University challenged

Helen Ingleson, Head of Advice and Research, Rathbone Financial Planning

Almost half of those aged between 18 and 30 will now go on to higher education but many families are beginning to challenge the wisdom of that move. Tuition fees alone now cost £9,250 a year at most English universities. On top of that, living costs can bring the bill for a three-year degree to over £60,000.

The government currently offers means-tested loans to students towards these costs but many parents will still find themselves paying a substantial proportion and are asking if they should just foot the whole bill.

Many commentators will argue that it is wrong to consider a student loan as a debt in the traditional sense — as a car loan might be. Where a student takes the loan option, as usually happens, they will only be expected to begin paying it off when they enter the world of work and reach an earning threshold of £25,000 p.a.. Typically, 9% of any earnings above the threshold will be taken from their wages.

From the day a student takes out their loan, interest accrues at a rate of 3% p.a. above RPI inflation, which itself is currently running at over 3%. This quickly compounds, growing faster than it can be paid off, but after 25 years the debt is written off. It means most are expected to never pay off their loan. So why worry about it?

Student loan debt does not undermine a graduate’s credit record (unless they miss repayments), but the repayments do affect their take-home pay and therefore are likely to limit their borrowing capacity for things like a mortgage or car loan, where affordability is taken into consideration. 

The first group of students facing this hefty debt is now entering the workplace. It is only just dawning on many of them how much they owe. Political pressure is already mounting. This February, Theresa May announced a wide-ranging review into post-18 education, looking into how future students will contribute to the cost of their studies, including the level, terms and duration of their contribution. The Prime Minister has, however, discounted the idea of moving back to a fully taxpayer-funded system. Meanwhile, Labour has spoken about abolishing loans and cancelling student debt.

That leaves clients asking us a number of questions about how best to help their children and grandchildren to save for the higher education funding challenge. Unfortunately, it is not easy to give clear answers. 

The rules on student finance keep changing every few years. We cannot foresee how they will change in future, and they vary from country to country within the UK. We can, however, offer here some principles and ideas that might help families with the process of thinking through the issues. 

Alternatives to university

The first question is, is it worth your child going to university? The government estimates that a degree is worth an extra £250,000 in lifetime earnings for a woman and £170,000 for a man. However, this is not always the case. For example, it has been found that those with degrees in the creative arts earn no more on average than non-graduates. And, more generally, there are signs that the gap between graduates and non-graduates is shrinking as more people go to university. Whether a degree is worthwhile could well depend on the job your child aims to do. It may also depend on which institution they study at. The Institute for Fiscal Studies has found large differences in earnings according to which university was attended — in part driven by differences in entry requirements. It found 23 institutions for men and nine for women where the median graduate earnings were less than those of the median non-graduate 10 years on.

If your child or grandchild shows no interest in studying or does not know what they want to study, it may be worth them postponing the decision until they are more mature or certain.

Apprenticeships are another option. The Rathbones apprenticeship scheme is now in its fourth year and has been so successful that it has been extended. It offers young people the chance to work in several departments over the course of two years and receive on-the-job training. 

Other companies, like Rolls-Royce, offer apprenticeships that mix work with paid university study leave. The apprenticeship model is growing and is worth researching. Apprentices work alongside experienced staff, gaining job-specific skills. Schemes can last from one to five years, depending on their level, and some can be the equivalent of a degree.

Ways to study more cheaply

For those who wish to go to university there are a number of options, albeit limited, to help reduce costs. 

For example, there are generous bursaries and sponsorships for students committed to careers in the armed forces to help them through university first. 

At Scottish universities, students who are residents of Scotland usually receive free tuition. This compares with £9,250 in England and Northern Ireland and up to £9,000 in Wales. They can also apply for loans to support maintenance but the repayment amount is 9% of their salary above £25,000. Before buying a second home in Edinburgh, it is worth checking out the definitions of what counts as residency! 

Another option is to study abroad. Research published last year found that some international degrees were a third of the cost of a UK degree. Germany was ranked as the cheapest place to study: with the country’s public universities operating a free-tuition system for international students, the average annual cost of studying is around £6,700 — made up almost entirely of living costs — compared to around £18,300 for a student in England. Some Italian institutions will offer free tuition as well as an allowance to cover living costs to successful applicants. Whether that remains the case after Brexit remains to be seen.

It is important to find out whether a degree from an overseas institution is internationally recognised. Even if it does not have quite the same allure perhaps as a degree from a British Russell Group university, an international degree may still impress employers because of the language expertise and resilience demonstrated to achieve success.

To pay or not to pay

If none of these money-saving alternatives is viable or appealing, and a place at a British university is the only option, many parents and grandparents are faced with the dilemma of whether to pay all the fees and costs or let their children take out a loan.

If you take the former option and a future government cancels loans it may prove to have been money wasted. Even if the Prime Minister’s review fails to offer any meaningful concession and the current loan system remains in place permanently, a number of other issues will affect whether it is worth paying fees to avoid student loans. If your child chooses a low-paid career or decides to switch courses or do a Masters degree (meaning they study for longer than three years), you may find yourself paying far more than they would themselves under the current system. The money you plan to give them might actually be better used helping towards the deposit for a house, saving them rental costs, potentially reducing the amount of interest they pay on their mortgage and providing longer-term security. 

At the moment there are no rules to prevent you paying off a loan for your child or grandchild at a later date. Given the uncertainties over the student funding system, and while you wait for greater clarity on your own child’s position, you may want to consider the option of starting with a student loan and temporarily investing savings you have accrued for financing higher education. With interest currently accruing at over 6% p.a. there is likely to be a cost for putting off a decision but it may be one worth paying. If you do opt for this compromise solution it is worth seeking advice on how best to invest the money given what might be a short-term time horizon.

The apprentice 

  Amy Kirby joined Rathbones on an apprenticeship scheme in October 2013, straight from school.
  “I had the option and the grades to go to university. Even though my school expected it of me, I didn't apply. Debt was one of the main reasons. I know people say it is fine and normal to have that much debt but it did not appeal to me. I was fortunate enough not to want to pursue a career where I had to attend university.  
  “The Rathbones scheme offered me the chance to move around the business with four six-month placements. Three months after joining I moved to provide maternity cover for an assistant in the investment management team and I never looked back. It’s such an interesting job — I help with investment administration, join meetings with clients and help keep them up to date. I am now beginning to get involved with investment — researching stocks and putting on trades for the managers. My ambition is to be an investment director myself one day and manage my own clients.
  “The apprenticeship gave me an NVQ in business and administration. I then completed the CISI industry exams and carried on from there. I am now a fully qualified chartered wealth manager — the youngest ever in the country. 
  “I found I enjoyed the studying much more than I did at school. I think with an apprenticeship you can start sooner and progress more quickly, earning from day one. For someone straight out of school — even after having paid rent to my parents — it felt like I earned a lot of money. My friends say they wished they’d done something similar.   “I think the perception of degrees is changing. In many professions you can progress without one. I have no regrets about not going to university.”