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At this time of year, prospective students will be anxiously awaiting their A level results to see if they match offers from received from Universities. Despite the recent increase in tuition fees, it seems that greater numbers of young people than ever before are heading for further education and the wait for results is a tense time for the whole family.
Once at University the problems are not over. Obviously there will be academic demands but there are also significant and increasing financial pressures. Most students do not receive grants these days but, instead, take out loans to cover both tuition fees and living costs. The latter is restricted if the parental income is high or if the student is living at home. The loans are on special income related repayment terms but there is still a considerable financial impact. Once the student has left college, loan balances are increased by inflation plus 3%.
A graduate leaving college in three year’s time could very easily end up with a loan of almost £50000. The loan is then repaid compulsorily with a 9% levy on any earnings over £21000.
The loan repayments are effectively a tax on graduate earnings. Repayments are limited by income but will go on for many years (up to a 30 year maximum).
It is, of course, possible to repay the loans more quickly than required if spare capital is available but, very often, this will not be the right thing to do.
Unfortunately this is just the sort of time of life that, traditionally, young people have saved up money to buy their first home. Clearly this is going to be more of a problem than it has been in the past if the loan has also to be repaid.
What then might parents do to help?
Well, obviously, many will not have the means to do anything other than accept that their offspring are more likely to continue to live with them for several years to come.
Those who do have greater financial means should consider putting money aside to help out and to start this process as quickly as possible.
Most parents will prefer either to retain these savings themselves until they are happy to pass them over or, alternatively, use a family trust which can serve a similar purpose. Normally, it would not be cost effective to create a trust purely for this purpose although there are some limited exceptions connected with investment products. If there is a pre-existing family trust then this could well be suitable although you should first take specific advice.
Of course, it is not only parents who might help. Grandparents might also wish to contribute and this could be the trigger to a wider review of Inheritance Tax issues for the older generation. Here it is more likely that we would advise the use of a trust as part of a wider plan.
Whatever your particular circumstances, this is an important financial event and one that bears serious thought.
Bob Wheatcroft, Partner
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