Should you pay your baby’s tuition charges upfront? A information to college funding

Students are no strangers to living on a shoestring budget, but the rising costs of higher education mean even the savviest spenders are being pushed beyond their means.

Not wanting to see young people struggle, the question for families becomes: what is the best way to help them?

Student finance has become increasingly complex, with student loans that have a repayment structure more akin to a graduate tax, and a maintenance scheme that is failing to keep up with inflation. 

Of course, not everyone’s budget will stretch to pay for the whole university experience. Here, Telegraph Money talks you through what you need to consider when deciding how to support your children through university, and how to make it work for your finances. 

What financial help is available for students? 

In the UK students can access a tuition fee loan of up to £9,250 a year to cover the cost of their course. These fees are due to rise to £9,535 next year, under Labour plans for tuition fees to rise by inflation. 

There is also maintenance loan funding available to cover living costs, but how much students are eligible for depends on their household income, where they live, and whether they’re living at home.

Student loans operate differently to personal loans, and have been likened to more of a tax, as repayment amounts are directly linked to the graduate’s earning. 

Loans are administered by the Student Loans Company, and the plan students are put on depends on the date of their course, and the type of study. 

An undergraduate student from England – the system operates differently in other countries within the UK – taking out a loan this year will be on Plan 5. This new type of student loan was launched in 2023.

Those on Plan 5 will start repaying the loan when they earn a pre-tax annual income of at least £25,000, charged at 9pc of whatever earnings are over this threshold.

Plan 5 loans will be written off 40 years after the graduate is due to start making repayments (the April after they graduate).

It is worth remembering that the loan will accrue interest straightaway – even while the graduate isn’t earning enough to make repayments. 

Student loan interest rates are usually tied to the March Retail Price Index (RPI) measure of inflation. However, high inflation has forced the Government to step in to temporarily change the way interest was calculated, and interest is currently capped at 8pc.

Should parents step in and pay for tuition fees?

The answer isn’t a simple one.

The issue for many parents is deciding whether it’s better to remove the financial burden of a tuition fee loan altogether, or – instead of spending around £50,000 on a loan their child may never have to fully repay – putting the money to use elsewhere. 

On one hand, while graduates could be paying off their student loans for the whole of their working lives, with interest payments taking the total into six figures for some, it does differ from other types of debt. 

Most significantly, student loans will not impact a graduate’s credit score and would not affect their ability to access credit. 

However, it can affect graduates’ finances further down the line – how much someone pays in student loan repayments every month may be one of the factors taken into account by a lender considering a mortgage application. 

Potential tax benefits

Megan Rimmer, chartered financial planner at Quilter, said: “If you are fortunate enough to be able to afford to help your children, there can be added tax benefits in doing so. For example, by using your gifting allowance or through regular gifting from your normal expenditure, you can reduce your inheritance tax liability over time.

“Paying the fees upfront will also boost take home pay for your child once they start earning, which may also mean they are less reliant on you when they are forging their career.”

Savings or investments could be beneficial

However, with savings rates currently beating inflation, parents could be better off putting it into a savings account for their child to use at a later date. A few years down the line your child could use it as a down payment on a house, for example.

“Saving in an Isa, even if the funds ultimately are for your child, would mean that you as a parent would retain complete control over the finances, including the timing of any withdrawals,” said Emma Watson, head of financial planning at Rathbones Group. 

You can save up to £20,000 into an Isa in each tax year – using the maximum allowance each year your child is in university would give a £60,000 lump sum by the time most students finish an undergraduate course – and that’s before adding in returns.

Alternatively, you could take the full tuition fee lump sum, around £50,000, and invest it on your child’s behalf. According to figures from AJ Bell, you would have a pot worth £352,000 after 40 years after making no further contributions – when your child may be looking to retire – assuming growth of 5pc a year after charges.

Investing the £50,000 lump sum for 10 years, until your child reaches their early thirties may want to buy a property, would mean you could contribute £81,500 towards their purchase, assuming that same 5pc a year growth.

Should you pay for student living costs? 

While a full tuition fee loan is available to all undergraduate students, maintenance payments are managed differently. 

Students are entitled to borrow up to £10,227 in maintenance loans if they are living away from home outside of London and £13,348 for those living in the city. However, how much individuals are entitled to depends on their household income. 

As a result, parents on higher incomes are expected to supplement their children’s living costs throughout their studies – and, as our guide shows, some university cities are much more expensive than others. 

While many may choose to fully cover the costs, there’s an argument that university is a key opportunity for students to have experience managing their own budget and learning some financial discipline before they graduate. 

“Even if you are helping your child with some living expenses, encouraging them to take some responsibility through part time work is a great way to understand the value of money,” said Ms Rimmer. 

“With the cost of living biting hard, it’s likely they will need some sort of help with day-to-day costs and it’s useful to make provision for that if you’re able.”

Some parents may therefore opt for a part-funded role, perhaps where their child contributes to their own living costs by getting a part-time job.