Personal Investing
Maike Currie, Fidelity Personal Investing 19 Jul 2017 03:53pm

The rising cost of university

SPONSORED FEATURE: Unless it means the cost of a beer at their local pub is going up, most students won’t be too worried about the prospect of rising inflation. After all, they’re far too busy enjoying the new found freedom of university life

Caption: How inflation will impact students.

But inflation should matter hugely to students, because it determines how much interest their student loans will rack up over time.

For those who started university after September 2012, the level of interest charged on student loans is linked to the RPI measure of inflation and begins accruing the moment the loan is taken out. The interest rate is updated once a year in September, using the RPI reading from March of that year plus a maximum of 3%, depending on how much a student earns.

With inflation rising rapidly, RPI hit 3.1% in March. This means, depending on what they earn, some students could face an eye watering interest rate of 6.1% on their loans - a 32% hike from the previous year and marked difference compared to those who took out student loans before September 2012.

That said, in some ways it’s not really helpful to think of a student loan as a loan. Perhaps a more accurate way of viewing a student loan is to think of it as a ‘graduate tax’. Just as higher earners pay a higher rate of income tax, so too now do graduates who pay a higher level of interest. Graduates only begin paying their loan off when they start earning £21,000 per annum or more, at which point they pay interest and/or repay capital at 9% of their income above this threshold.

What really sets student loans apart from any other debt is that what remains unpaid 30 years after you become eligible to start repayments will be written off. With student debt expected to exceed £57,000, it’s likely that a significant proportion of students won’t re-pay their loan in full.

However, it’s worth remembering that the young will be facing a very uncertain future - with a competitive jobs market, protracted Brexit negotiations, the burden of caring for an aging population and the ongoing challenge of getting a foot on the increasingly elusive property ladder. Understandably, parents will feel uneasy about sending their children into the world with the long shadow of student debt hanging over them.

For parents who want to lend a helping hand, here are three tips for covering the cost of university:

1. Be prepared to supplement the student loan - You may wish to provide your child with some support, perhaps by covering living expenses. Depending on where they go to university, reasonable living costs may be higher than the total amount your child is able to borrow.

2. Jump start a JISA - It’s never too early for prospective parents or parents of younger children to think about putting something away. Even if your child does choose to take out a student loan instead of using the JISA savings, you can always earmark the accumulated pot for the down-payment on a property after they have graduated. Just remember that when your child turns 18, the JISA becomes their ISA and they assume full control, so it’s important to educate your child about how to use this money wisely.

3. Talk to grandparents - Parenthood can be expensive and with real household incomes under pressure, many parents may simply not be able to afford to contribute to higher education costs. If this is the case, the solution could be to call upon the bank of Grandma and Grandad. By gifting money to their grandchildren, they could even reduce their inheritance tax bill.

Maike Currie

Marrie Currie

Maike Currie is an investment director at Fidelity International and the author of The Search for Income – an investor’s guide to income-paying investments. She acts as a spokesperson and commentator on investments and consumer finance with a special focus on income, interest rates and inflation. Prior to joining Fidelity, Maike worked as a financial journalist across a number of titles in the Financial Times Group. She continues to write a regular column for the FT. 

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