Will our students face a Greek tragedy of debt?
With the problems in Greece becoming a daily feature in the news, it seemed the right time to have a look at a debt problem-in-waiting which is even closer to home. Maybe even sitting at home right next to you now. If you have a soon-to-be student in your family, student debt could well be in your thoughts.
New undergraduates starting university this autumn in England face higher fees, a new loan system and possibly a working life overshadowed by student debt (1). All this proposed by politicians who largely enjoyed free university education.
It’s news to produce more tears than laughter, but there is a ray of hope. Yes, after 30 years your student debt is wiped out. So that’s a mere three decades of being burdened with debt. Another small piece of good cheer is that graduates will pay back at the rate of 9% of their earnings above the threshold of £21,000, but if you never earn more than £21,000 then you won’t need to repay the loan.
For us, the two key points in the new system are:
• The vast increase in tuition fees, from £3375 to £9000 now charged by many institutions
• The above inflation interest that will be charged on the loan – under the current system the cost of borrowing is set at the rate of inflation. The new system will charge inflation (RPI) plus 3% while studying and after studying the amount of interest charged will rise from RPI to RPI plus 3% as your earnings rise.
According to the Institute for Fiscal Studies, this means that most young people will pay back more than under the old system, with higher earners paying back almost double what they pay now (1).
Under the old system, interest on student debt was limited to inflation so to many observers this looked like fairly cheap money. Now students will be paying back not only the cost of their tuition but also the cost of financing it too. And, politicians being politicians, we cannot see the system becoming any cheaper, in fact we feel the opposite is more likely.
To summarise, this complicated system means your student debt will last for longer and you may end up paying a lot more.
So what financial planning can parents do to help their children cope with this extra burden of student debt?
First of all, make sure you have a plan. If you have around five years before university begins then saving within a cash ISA may well be the best solution. If the time horizon is greater than five years then equity (share based) investment could offer the prospect of greater returns.
A tax efficient solution can be to save within an offshore bond wrapper. These offer almost tax free growth with the tax on the gain being deferred for up to twenty years. Even better, the tax liability can be eliminated if the bond is gradually assigned to a student son or daughter. Many students will not use their personal allowance (the amount they can earn before beginning to pay income tax) and the taxable gain on the bond can be offset against this allowance.
We’re often asked for general advice on saving for children and the problem with many solutions is the loss of control the parent has over the investment. But an Offshore bond remains the property of the parent or parents (they can be jointly owned) but can be drip fed to children to use the child’s personal allowance tax efficiently, and increase the chances of the money being spent wisely. If your child decides not to go onto further education and accumulate student debt the money can be given in a similar way to the child to fund a new business a car, or the deposit for a house.
Of course, you may always decide to keep the money and buy a sports car, a boat or provide additional income in retirement…
If you would like a free consultation about student debt and finances, call Andrew Stallard on 0845 230 9876 or e-mail firstname.lastname@example.org.