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How to give your children a financial head start for university

Written by: Emma Lunn
Investing £180 a month into a Junior ISA for 18 years could generate enough for your child to graduate debt-free.

Clued-up parents who start saving for their child’s university costs as soon as they’re born could save enough for their offspring to finish university debt-free by putting aside just £180 a month.

According to Fidelity International, saving £180 a month into a Junior ISA for 18 years could generate a pot worth more than £55,000 by the time they are 18. The calculation assumes 5 per cent growth a year and annual management charge and platform service fees of 0.75 per cent.

With government figures suggesting the typical student debt now stands at about £50,000, this should be enough to cover their entire university costs.

For those with less to invest, a monthly saving of £100 could generate returns of £30,874 – more than three years’ worth of tuition fees.

Parents wanting to maximise the Junior ISA allowance of £4,368 – equivalent to putting away £360 a month – could potentially launch their child into adulthood with a total sum of more than £110,000.

A Junior ISA is a tax-efficient way to save money on behalf of a child, without being charged income tax or capital gains tax on any returns. However, parents should understand that when their child reaches 18, they gain control of the account and may not make sensible spending decisions.

Students pay up to £9,250 in tuition fees each year while living costs for three years are likely to top £26,000.

Prospective students looking to cover these costs by taking out a loan will also face an interest rate of 5.4 per cent. Interest charged on student loans while studying is linked to the RPI measure of inflation from March each year plus 3 per cent (for March 2019 RPI stood at 2.4 per cent), while interest for those who have graduated is calculated based upon RPI plus a maximum of 3 per cent (depending on how much they earn).

Graduates only have to repay their student finance when they earn above the threshold. From April 2020, the threshold will stand at £26,575 a year. Loans are written off after 30 years, meaning a proportion of people will never need to repay some or all of their debt.

Emma-Lou Montgomery, associate director for personal investing at Fidelity International said: “Students around the country will soon be collecting their grades and celebrating the well-deserved fruits of their labour. For many, these will pave the way for the next significant milestone in their education – packing up and heading off to university.

“With the costs of a typical three-year degree amounting to more than £50,000, they need to be thinking carefully about how they plan to finance this next life stage.

“Parents wanting to help their children avoid a long-term student debt may well look at whether they are able to offer financial support – however, accumulating more than £50,000 requires a level of forward planning.”

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