Escalating degree costs are a reminder to save as soon as you can

14 August 2013
 

With A-level results for England and Wales due out tomorrow, thousands of sixth form students will be discovering whether they have secured a place at their chosen college or university. The costs of a degree have spiralled in recent years, with figures suggesting that a course could cost in excess of £50k on average over the next three years. For those left to carry the financial burden of a degree entirely on their shoulders through a student loan, the real cost could potentially be significantly higher than £50k once years of servicing interest charges are taken into account.

Jason Hollands, Managing Director at Bestinvest said: “Many students are leaving higher education with significant debt and faced with a tough jobs market. The government’s own statistics suggest around 70% of students who started university last year will end up repaying between £65,000 and £85,000 once interest costs are factored in but for some it may be much higher. That’s a sobering thought when official statistics claim the benefit of a degree is on average worth £100k in earnings over a lifetime compared to those of a non-graduate. In financial terms at least, the case for an “average degree” may not be convincing.”

“The costs are clearly daunting. Yet a degree can be a life-changing experience and for many a valuable passport to improved career opportunities. The key to cracking university funding is to start as early as possible. Based on an assumption of achieving an average return of 5%, net of charges, each year you would need to invest £1,700 a year for 18 years to generate approximately £50,000. However, add in an inflation assumption of, say 3%, and the required sum is more like £2,900 per year.

“To illustrate the impact of delaying, If you only start accumulating a savings pot 10 years ahead of the date the funds are required (when the child is eight) then the annual sum to be saved will need to be around £5,100 per annum (based on the above return and inflation assumptions). There is of
course a good deal of uncertainty in these assumptions, as historically education cost inflation has been higher than general inflation, so they may be too optimistic, equally you may find markets deliver higher returns than the 5% assumption we have used.

“Your first port of call for building a savings pot could well be a Junior ISA; the Government’s flagship savings scheme for children, launched two years ago. These enable parents and guardians to invest either through regular monthly savings or through lump sum investments into an account that can hold cash or stocks and shares (or funds investing in stocks and shares). All returns accumulate free of tax on gains and Income Tax as the value of the Junior ISA builds over time. At age 18 full ownership of the account passes to the child, enabling them to either withdraw funds or continue with the investments as an adult ISA. While cash is an eligible investment in a Junior ISA, we think this will be the wrong place to park money for the long term. This is because its real value will slowly be eroded by inflation over time and, of course, savings rates are currently very low.”

Funds suitable for a Junior ISA

Hollands continued: “Given the long term nature of Junior ISAs, parents investing for very young children should focus on equity funds. These are likely to have a high degree of volatility but offer the potential for greater returns. One option would be to split the Junior ISA between a global equity fund focused on developed markets, such as Aberdeen World Equity, and an emerging market fund, such as JP Morgan Global Emerging Markets Investment Trust.

“Alternatively, you may consider investing in a diversified global investment trusts such as Edinburgh Worldwide, Scottish Mortgage IT or RIT Capital Partners.

“Nevertheless, some parents will be nervous about their children gaining access to a pot of assets from their Junior ISA on their 18th birthday and therefore may prefer to use their own adult ISA allowance, which is £11,520 for the 2013/14 tax year, as a way of accumulating funds to help support their children through university in the future.”

Hollands concluded, “Whatever you choose to do the important thing is not to delay too long. Remember: the earliest pound invested will be the most valuable one in the long run.”

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Important information:
This article is not advice to invest, or to use any of our services. The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.

More information on the Bestinvest Select Junior ISA can be found at:
https://select7.uat.bestinvest.co.uk/products-services/junior-isa

More information on the Bestinvest Select ISA can be found at:
https://select7.uat.bestinvest.co.uk/stocks-shares-isa

About Bestinvest:
Founded in 1986, Bestinvest has grown to become a leading private client investment adviser, looking after £5 billion of assets for more than 50,000 clients. We offer a range of investment services from Select for self-directed investors to Investment Advisory and Investment Management services for clients who do not have the time or inclination to manage their own investments.

All of our services are underpinned by rigorous research aimed at identifying those fund managers we believe will deliver long-term superior performance. We also have a team of expert financial planners with nationwide coverage to help clients with their pensions, retirement or Inheritance Tax planning. At Bestinvest, we pride ourselves on offering the highest levels of professionalism and expertise with transparent, competitive prices. We are pleased that our greatest source of new business is from personal referrals from existing clients.

Bestinvest has won numerous awards including UK Wealth Manager of the Year 2013, Best Wealth Manager for Investments 2013, Best Stockbroker for Customer Service 2012 and 2011 Self Select ISA Provider of the Year as voted by readers of the Investors Chronicle and the Financial Times.

Headquartered in Mayfair, London, Bestinvest employs more than 200 staff and has an extensive network of regional offices. The company is one of the fastest-growing private client advisory firms.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.