University... or bust
What the funding review means for you
Further education and the financing systems that prop it up are “outdated and expensive”, Theresa May said yesterday as she announced a broad review of the sector. It will take into account the scale of tuition fees, the lack of vocational training and, crucially, the interest rate paid by those taking out student loans.
Any proposed reforms are likely to be years away from implementation. Even then the crucial financial question facing most families will remain: how best to help offspring finance their further study?
The average debt on graduation is now more than £50,000, and research suggests students are increasingly aware of the financial challenges they face. They are also more likely than ever to have candid conversations about cash with their parents or grandparents.
If they do borrow – as most now do – they are also likely to save some of the money, at least for a period. Research from The Student Room, an online forum, and Circle, a money-saving mobile app, suggests that a third of students now put some or all of their loan into savings.
Jack Collier, from Circle, said: “Students are very savvy so it’s no surprise many are saving the money from their loans.
There are people who need their loans for their expenses, and then there are people who maybe only need 30pc of it. It’s there, why wouldn’t you take it?”
Research carried out by investment broker Hargreaves Lansdown for Telegraph Money shows that through clever planning, and a bit of luck, a student could make £6,000 profit from their maintenance loan in 10 years – even with the eye-watering interest rate.
Beating the system
Student finance is split into two parts: a tuition fee loan, which Theresa May set firmly in her sights yesterday, and a maintenance loan. The former is currently capped at £9,250 a year. The latter is paid into the student’s bank account to cover housing and living costs.
The maximum amount you can borrow if you live away from home is £8,700 a year (or £11,364 in London).
Repayments kick in when you begin earning a salary of £21,000 (expected to rise to £25,000). Graduates then pay 9pc of everything they earn above that threshold into servicing their student debt – with any remaining balance erased after 30 years. The interest accrued on the loan is trickier. The rate is linked to the retail prices index (RPI), a popular measure of inflation, which is currently 3.1pc, and then increases on a sliding scale depending on the borrower’s wage. Controversially, students pay the highest rate while they’re studying. So for three years a student’s debt is accruing at the highest possible rate, despite them being unable to make any payments. There is an argument, heavily promoted by moneysaving guru Martin Lewis, that the interest rate is irrelevant. Most graduates will never pay off their loans before it gets wiped away after 30 years. He encourages most students to borrow.
Investing the money is another consideration.
Sarah Coles, of Hargreaves Lansdown, said: “Technically, if parents can afford to support their child through college, then the student could take the loan and invest it. Unfortunately, given the interest rate on student loans, there are very few circumstances in which they would be better off.”
It is possible, however, by using a Lifetime Isa. These come with a 25pc government bonus on savings of up to £4,000 a year. The money must be put towards a house purchase or pension. Assuming the student leaves university, gets a job paying the average graduate salary (£23,000) and experiences wage growth of 4pc a year, they could put the loan into a savings account paying 2pc and feed it through to a Lifetime Isa invested in a low-cost basket of shares at a rate of £4,000 a year.
If the Lifetime Isa grows by 5pc a year then they would be up by £6,000 after nine years when the entire loan would have been invested. The graduate would be left with £58,857 in the Lifetime Isa and £2,062 in the savings account. The total “cost”, comprising everything the student has paid to date and the amount still outstanding including interest, would be £54,960.
There are many dangers. The Lifetime Isa would need to be invested in stocks and shares, as cash wouldn’t generate the returns. “These calculations assume everything works
according to averages. In reality you would be exposed to all sorts of risks,” said Ms Coles.
“If parents can afford to meet the costs of fees and maintenance, the student would be better off taking the loans and living off them, while the parents used the cash they would otherwise spend supporting the student to build up a lump sum in a savings account by graduation.
“At that point, if the student starts on a salary of £45,000 or more and looks set for a glittering career, they may be best off using the cash to pay the student debts. In any other case, their child is unlikely to ever repay those debts, so they are better off using the money put aside in the savings account to give their child a good start in life, and possibly as the deposit on a property.”