The Cost of Learning

A-level students will be going through the difficulties now of the university application process. Of course, the academic requirements are fundamental but these days the cost of being at university has hit the headlines. The new system starts for those students applying now and they (together with their financial backers in the form of parents and grandparents) have some decisions to make.

University fees for next year can be up to £9,000 each year but there are other costs to consider too. If the student is to live then there is the cost of accommodation and other niceties such as food, drink and books.

There is a student loan scheme in place which covers the whole of the fees and a means tested (on the parents) loan for maintenance expenses. The terms of these loans are also to change from 2012 in important ways. Students from lower income households (income up to £42,600) can also qualify for means tested maintenance grants which do not have to be repaid but it is the loan system that I want to concentrate on today.

I want to highlight the two issues of initial affordability and the manner any parental support might be directed if the family is able to make choices.

The basic system is that the loan does not have to be repaid at all until the student earns more than £21,000 with repayments being made at 9% of any excess over that figure. Any loan left after 30 years will be written off. Interest is added to the outstanding balance at rates between inflation (this time the use of the lower CPI index works in your favour) and inflation plus 3%.

This will tend to mean that loan repayments will be lower than under the old system but will go on for much longer – indeed many student loans will no doubt be partially written off and the system will have many of the features in practice of a graduate tax at a rate of 9%.

I think many families who could choose to afford to fund students through university without loans will still choose not to do so and will see the repayment structure as better than finding the hard cash up front. Some may effectively choose to do both by setting up trust funds to repay the loans early when the time seems right. The rules for early repayment have not yet been announced but those students going into very highly paid work at an early stage might wish do this as they would be paying the highest rate of interest on outstanding loans.

An alternative to this which can be very attractive is to purchase property for use by the student and his/her friends with rents from the friends being used to fund a mortgage. This can be very attractive and, indeed, tax efficient if structured properly – preferably using a trust arrangement. Once the student has finished at university the property can either be kept or sold as circumstances dictate.

Student finance has serious financial implications these days and should be approached carefully like any other major financial decision.

Bob Wheatcroft
Partner and Head of Tax

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