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UK parents should adopt US style ‘college fund’ for kids’ education

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Written by: Paloma Kubiak
18/09/2017
The US concept of the ‘college fund’ must become an essential part of financial planning for UK parents, a Mutual warns. It comes as a separate study proposes an all age graduate tax in England to ease the financial burden.

UK parents who want their children to go to university should start building a ‘college fund’ as soon as possible, according to NFU Mutual.

Means testing of the student maintenance loan in England msy result in children from all but the lowest income households not being able to borrow all they need to support themselves.

NFU Mutual suggests this year’s shortfall alone will hit £5,500 for some students, with parents considering unsecured loans to make up the shortfall.

Sean McCann, chartered financial planner at NFU Mutual, said many parents are aware their children are likely to graduate with an enormous debt, but some won’t realise the size of the financial burden.

He said: “The US concept of the ‘college fund’ must now be an essential part of family finances in the UK if university is a realistic ambition. Even now, two parents on average salaries could need to fork out more than ten thousand pounds between them to top up the maintenance loan over a standard three-year undergraduate course.

“We’re in a situation where middle-income parents with young children will have to start planning in earnest. Those with several bright kids are likely to have an even greater financial burden.”

This September students from lower income families will be able to borrow £5,500 per year more than others to pay for living costs. Students coming from households with an income of more than £25,000 won’t be able to borrow the full amount, potentially pricing them out of a university education, NFU Mutual warns.

McCann added: “Most people will look to an ISA to build up a nest egg and some might want to consider investing in stocks and shares if they have five or more years to invest. However, Junior ISAs are not necessarily the answer as the child will have full access on their 18th birthday and that could become an unavoidable distraction ahead of A-levels,” he said.

“As some people have children later than others, there will be a number of parents who may be able to access their pension pot by the time their child starts further education. At the moment, pensions are one of the most tax efficient way to invest money – particularly for higher earners.”

Graduate tax in England?

Today’s NFU Mutual report comes as the Centre for Learning and Life Chances in Knowledge, Economies and Societies (LLAKES), together with UCL Institute of Education, published its case for an ‘all-age graduate tax in England’.

Given the large increase in higher education tuition fees in 2012, new graduates are leaving university with “very heavy debt repayment obligations” which LLAKES said are “inequitable and difficult to sustain”.

The report read: “Inequitable, because current and future generations of students are expected to pay for HE opportunities which previous generations of graduates received for free. Difficult to sustain, because three quarters of current student borrowers are not expected to be able to repay their loans in full before their outstanding debt is written off after 30 years, as provided for in the current loan system. The full extent of these underpayments is hard to predict. Hence, the long-term fiscal foundations of the income-contingent loan system are both uncertain and weak.”

As such, it’s proposing an all-age graduate tax which it said would have three key advantages compared to the present HE loan system:

  • This tax would be applied to all existing generations of graduates, not just to recent graduates who are expected to meet the onerous repayment obligations attached to student loans.
  • Graduate tax payments made by those earning over £21,000 would be lower at all levels of earnings, than are current annual loan repayments, and therefore less burdensome on graduates.
  • An all-age graduate tax would contribute to government tax revenue from the first year that it was introduced, bringing substantially more revenue than the current level of loan repayments made to the Student Loans Company. It would therefore provide a more secure fiscal foundation to HE finances than can be achieved through the present loan system, it stated.

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