Students typically live on a budget, but the rising cost of higher education means even the most prudent students are living beyond their means.
Because families do not want young people to get into trouble, they ask themselves the question: how can they best help them?
Student financing has become increasingly complex, with student loans whose repayment structure more closely resembles a tax on graduatesand a maintenance plan that does not keep pace with inflation.
Of course, not everyone’s budget can afford the entire university experience. Here, Telegraph Money tells you what to consider when deciding how to help your children through university, and how to make it work financially.
What financial aid is available for students?
In the UK, students can get a tuition fee loan of up to £9,250 per year to help cover the cost of their education. There is also a maintenance loan available to help cover living costs, but how many students qualify for this depends on their household income, where they live and whether they live at home.
Student loans work differently than personal loans and are more likened to a tax, as the repayment amounts are directly tied to the graduate's income.
The loans are managed by the Student Loans Company. The plan students are included in depends on the date of their education and the type of study.
An undergraduate student from England – the system works differently in other countries within the UK – who takes out a loan this year will be eligible for Plan 5. This new type of student loan was launched in 2023.
People under Schedule 5 will start repaying the loan once they have a gross annual income of at least £25,000. Income above this threshold is subject to a 9% tax.
Plan 5 loans are amortized 40 years after the graduate must begin repayment (the April following graduation).
Please note that interest will be charged on the loan immediately, even if the graduate does not earn enough to make the repayments.
Student loan interest rates are typically linked to the March Retail Price Index (RPI) measure of inflation. However, high inflation has forced the government to temporarily intervene and change the way interest is calculated. The interest rate is currently capped at 8%.
Should parents step in and pay tuition fees?
The answer is not simple.
For many parents, it’s a question of deciding whether it’s better to remove the financial burden of a student loan altogether, or – rather than fork out around £50,000 on a loan their child may never have to pay back in full – use the money elsewhere.
On the one hand, graduates can spend their entire working lives paying off their student loans, with interest payments running into six figures for some. However, this is different from other types of debt.
Most importantly, student loans do not affect a graduate's credit score or his or her ability to obtain credit.
However, it can have consequences for graduates' finances later on: how much someone pays each month in student loans may be one of the factors a lender takes into account when considering a mortgage application.
Possible tax benefits
Megan Rimmer, Chartered Financial Planner at Quilter, said: “If you are lucky enough to be able to help your children, this can provide additional tax benefits. For example, by using your gift tax exemption or making regular gifts from your normal outgoings, you can reduce your inheritance tax liability over time.
“If you pay the costs up front, your child’s net income will also increase once they start earning money. This can also mean that they are less dependent on you as they build their career.”
Saving or investing can be beneficial
But because savings interest rates are currently lower than inflation, parents would be better off putting their money into a piggy bank. savings account for their child to use later. For example, a few years later, your child could use it as a down payment on a house.
“Saving in an Isa, even if the money is ultimately for your child, means you as a parent retain full control over their finances, including the timing of any withdrawals,” says Emma Watson, head of financial planning at Rathbones Group.
You can save up to £20,000 in an ISA each tax year. If you use the maximum allowance in each year your child is in education, that would add up to £60,000 by the time most students finish their undergraduate degree. And that’s before you factor in the income.
Alternatively, you could take the full tuition fee in one go, around £50,000, and invest it on your child’s behalf. According to figures from AJ Bell, after 40 years, with no further contributions, you would have a pot of £352,000 – when your child might want to retire – assuming growth of 5% a year after fees.
If you want to invest the lump sum of £50,000 for 10 years, until your child is in their early 30s, you could consider: buy a housewould mean you could contribute £81,500 towards its purchase, assuming the same growth of 5% per year occurs.
Do you have to pay for the costs of your student life yourself?
All undergraduate students can receive a full student loan, but maintenance payments are managed differently.
Students are eligible for up to £10,227 in maintenance loans if they live away from home, outside London, and £13,348 for those living in the city. However, how much individuals are eligible depends on their household income.
As a result, higher-income parents are expected to supplement their children's living costs while they study – and, as our guide shows, some university cities are much more expensive than others.
While many students choose to cover their entire cost, college is also said to be a great opportunity for students to gain experience managing their own budget and learn financial discipline before graduation.
“Even if you help your child with some living expenses, it is a good way to encourage him or her to take on some responsibility through part-time work,” says Mrs Rimmer.
“With the cost of living rising so much, it is likely that they will need help with their daily expenses. It is helpful to make provisions for that if you are able to do so.”
Some parents may therefore opt for a partially funded role, where their child contributes to their own living expenses, for example, by get a part time job.