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Unless you’ve been out of the country for the last year or so, it has been impossible to miss the debate over university fees. From 2012 onwards English universities will be able to charge tuition fees of up to £9,000 per year. Of course, the maximum figure of £9,000 relates only to tuition fees; accommodation and living costs need to be factored in on top of this.
Tuition fee loans are available to cover the cost of the tuition fees, which are paid direct to the university by the government. A living cost loan, also known as a maintenance loan, is also available to full-time students to help with the other associated costs, such as accommodation and food. The maximum maintenance loan for students studying outside London is £5,500 per year, therefore, a student paying the maximum tuition fee and taking the full maintenance loan could leave university after three years with a debt of at least £43,500.
Standard Life recently carried out research into this area and their studies show that parents significantly underestimate the amount of debt their children are likely to leave university with. Just 18% of those surveyed thought that the maximum debt would be between £40,001 and £50,000 and just 4% estimated that it would be between £50,000 and £55,000.
On graduation and obtaining employment the loans must be repaid once the individual earns over £21,000. However, the loans are not tax free. For students starting courses in 2012, interest equivalent to inflation (retail price index) plus 3% is charged from the start date to April 2016. After April 2016 the rate of interest charged is dependent on the level of earnings. For those earning under £21,000 the interest rate is the rate of inflation, for those earning between £21,000 and £41,000 RPI plus up to 3% and if earning over £41,000 RPI plus 3%. The repayments are automatically deducted from the individual’s pay.
For those parents with children starting university next year who haven’t done any planning it’s probably too late to do anything now, except to prepare to have a fairly empty bank account. However, for those with a little more time to prepare it is possible to reduce the debt your child begins their working life with.
Like any form of saving, the earlier you start the better. The obvious methods of saving should always be considered, such as making use of the annual ISA allowance, with friendly society plans also being utilised to make the most of tax efficient savings.
A less well known option could be an offshore investment bond. This allows the funds invested to grow without deduction of UK tax and although UK tax is payable when the capital is returned to the UK, careful planning can minimise or even avoid tax altogether. With an offshore bond the parents retain control of the investment, so if your child decides not to go to university, or the government decides to abolish tuition fees, the cash can be used for other things.
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