Remember when the government used to pay students to get degrees? It's now over a decade since tertiary education waved a sad goodbye to free university places, and as university costs have spiralled in recent years, the bank of Mum & Dad is increasingly stepping in. No one wants to see their children lugging around the tiresome ball and chain of student debt worth £50,000 when they graduate, but before stepping in you need to know the facts.
If you're a parent, the reality of these costs might make you squirm. But by getting a breakdown of the expenses ahead of time and planning how much you want to subsidise your children, you'll minimise the shock when they eventually fly the nest, settle in overpriced student halls, and adopt the arm-out palm up "I need money" stance.
The overall cost of sending a young adult to university for three years depends on a number of factors:
■ Where they study (highly ranked universities are the most expensive);
■ Their accommodation (rent in some regions is higher than others); and
■ How much their lifestyle costs (will they be eating super noodles?).
Students who started their degree last autumn will graduate with an average debt of £53,330, according to data from insurance company LV=. The loan comprises two parts: up to £9,000 a year for fees, and a maximum maintenance loan of up to £5,500 if they're living away from home outside London, or £7,675 if they're living away from home in London.
But if you think the loan will cover all the costs, think again. If your household earnings are less than £42,600 you can apply for a bursary, but if you earn more than that, the help stops at the basic maintenance loans.
But the maintenance loan simply isn't enough. The average university student will have just £11.15 left in student support to live on after paying for their rent and utility bills, a National Union of Students (NUS) survey revealed earlier this year. Santander research reveals four out of 10 students have a part time job, but if they're in the 60 per cent non working majority, it's likely they'll be asking you for money to cover either their rent or living expenses - adding thousands onto the actual cost of their degree.
Should you let your child get a student loan?
No one wants to let their children start their adult life with a mountain of debt if they can help it. But is student debt really that bad? The politicians claim it isn't anywhere near as toxic for your finances as "proper debt". It's true that student loans aren't quite the same as ordinary loans: you don't pay back a penny until your're earning £21,000 or more, repayments are capped at 9 per cent of your income, and if you haven't paid it off within 30 years, the remainder of the debt is cancelled.
But don't let this friendly packaging lull you into the idea that this is not real debt. Post 2012 student debt grows at a rate of Retail Price Index inflation (RPI) plus 3 per cent, meaning the longer you don't pay it off, the bigger it becomes. As a result, the government has already admitted half of students will have so much debt their loans will be cancelled after 30 years. So unless your kids are in the top 50 per cent of graduate earners, they can expect to spend the vast majority of their working lives funnelling 9 per cent of their wages into debt repayments if they take out a full loan. That 9 per cent a year is a crucial piece of income they could have used to buy a house or raise a child. And financial advisers say that due to the mounting interest on unpaid post 2012 student loans, it makes most financial sense for graduates to prioritise paying it off above saving money or buying a house.
If you can afford to support your children through university but you're not sure of the best way to go about it, here's some ideas on how to do it.
Give them a lump sum before they go to university
A lump sum could be put towards living costs, used for tuition fees or both. The downside here is that if your child knows they're being subsidised they might be likely to spend more frivolously, and the money has to go in their name unless you put it in a trust, which can be very expensive. You need to ask yourself if you can really trust your 18-year old with a lump sum? If not, Lucy Brennan, partner at Saffery Champness, suggests paying your child's tuition fees upfront. Another perk with this is that it counts as upkeep of the family rather than a gift. Doing this exempts it from tax, unlike gifts worth more than £3,000 which are taxable if you die within seven years of you giving them, so this could be a good move if you have a lump sum to give.
But on the other hand, being upfront with your children about how you're going to help them can be a positive step. 17-year-old A-level student, Beatrice Locke, is hoping to get a place at the London School of Economics next year, one of the most expensive universities in the UK. But because she has already sat down with her parents to talk about how they can help her, she knows where she stands and is planning to get a part time job alongside her studies to help fund her tuition fees.
Give them a lump sum when they've graduated
Another option is to let them get the full student loan and then pay some or all of it off when they finally graduate. This option also gives you a few more years to save or invest to raise the funds. If you wait there's also the option of not telling them you're going to help, which will probably make them think twice before spending half their student loan by the end of fresher's week. But if you're waiting to give a lump sum as a gift, remember you have to live seven years after you give a gift worth over £3,000 in any one year until it is free from inheritance tax.
A loan from the bank of Mum & Dad
If you don't like the thought of your children being in debt to the Student Loans Company you could think about loaning them the money instead. You can set up this arrangement on a trust basis or have an agreement legally drawn up for an initial fee of around £500 to £1,000. But Patrick Connolly, financial planner at Chase de Vere, says both options are "fraught with danger. Most people don't bother with a legal agreement because of the offence it can cause within the family if kids don't feel like their parents trust them. But on the other hand, if you loan your kids £50,000 and they are unable or unwilling to pay it back, there's not much you can do if there's no legal paperwork".
Giving them regular income
Because maintenance loans don't cover rent and living costs it's common for parents to give children money every month for everyday living costs. This option allows you more control over your children's budget, but you need to watch out for your salary falling behind the rental market and living costs.
