In the UK, paying for education affects many parents and their student offspring at some point. Thousands are already paying college and university fees, and the trend of rising fees and falling grant facilities is likely to continue for the foreseeable future. Research suggests that putting a child through a 14-year private education in the UK can currently cost up to £300,000. This article looks at some of the options for saving for education costs.
There are four basic ways of paying school fees:
- saving from an early age so that enough capital has been accumulated when the child starts school;
- taking out a loan when the child starts school;
- paying school fees out of income; or
- using a combination of these methods.
Whether a particular investment is suitable will largely depend on the investor’s attitude to risk, the investment term, and the taxation situation. Some of the investments that are typically used for saving school fees include Individual Savings Accounts (ISAs), fixed term annuities, and National Savings.
Currently, the annual ISA allowance enables individuals to save up to £20,000 a year tax-free. This means that there is scope for a couple to save £40,000 a year between them. Junior ISAs also enable tax-free savings for children under the age of 18 years. All children living in the UK are generally eligible for a Junior ISA and the annual savings limit is £9,000 in 2020–21. Where a parent saves money for their child, unless the income arising is below the de minimis limit of £100 per parent per child, all income arising is generally assessable on the parent. However, income from a junior ISA is specifically excluded from this rule.
Children aged 16 and 17 years effectively have two ISA allowances. They have the Junior ISA allowance, plus they are eligible to open an adult cash ISA.
By investing the maximum amount permitted in a stocks and shares ISA and selecting well-managed funds, a very worthwhile sum may be accumulated. Of course, choosing which funds to invest in is not always easy, so it may be worthwhile seeking professional advice on the options available. It is also worth noting that tax rules could change in the future and the value of any favourable tax treatment will depend on individual circumstances.
Educational Trusts and Composition Fees, which are generally paid to the independent school of choice, have tax advantages, but only if the child eventually goes to that school. The rules regarding these types of trusts are highly complicated and quite inflexible.
There are various ways to take out a loan to finance school fees, including some specialist school fees plans. For homeowners, given current low interest rates, the most cost-effective way of raising capital may be to extend an existing mortgage. However, individuals should always be aware that if they do this their home will be at risk if they do not keep up the repayments. Mortgage payment protection cover may be worth considering for coping with potential unexpected changes to circumstances such as redundancy. Borrowers also need to be sure that they can meet repayments if interest rates increase. Professional advice is always recommended prior to undertaking any transactions.
Paying out of income
A parent or guardian may be lucky enough to have sufficient income to pay school fees entirely out of his or her income. However, school fees also have a habit of increasing faster than earnings, so provision will have to be made to ensure that the fees can be met throughout the child’s period of education. The effect of redundancy on ability to pay fees should also be considered. Consideration should also be given to protecting the ability to fund or pay for private education in the event of death, critical illness or being unable to work through accident or illness.
With education costs rising faster than inflation, parents are staring down the barrel of a pretty big savings target. The earlier parents – or expecting parents – can start saving, the better.
To minimise the impact of borrowing, saving for school fees should be started as early as possible. In very basic terms, parents with a new-born baby would currently need to save around £120 a month to cover the cost of a three-year university course starting in 18 years time. For parents with a child of 10 years who have not yet started to save, the required monthly figure will have already risen to over £200 a month.
Partner Note: SI 1998/870; ITTOIA 2005, s 694; TCGA 1992, s 151; National Savings and Investments: www.nsandi.com