Education, as every parent knows, can be a costly business. The average cost of sending a child to private day school is now over £14,000.
University tuition fees alone cost up to £9,250 a year. Add in maintenance costs for the likes of food and rent and the expense of a university education can soar. Many parents - and increasingly grandparents too - are happy to make financial sacrifices to ensure their children receive the best education. What they are buying for their offspring isn’t just academic excellence, but world-class sporting, drama and other facilities, as well as a solid preparation for a fulfilling later life.On top of that, nobody wants their children or grandchildren to leave university saddled with debt.
The good news is that the financial cost of education need not be a burden if you plan ahead with care. Many people leave thinking about how they will fund education costs until their child is about to start school or university. By that time your options will be limited. The earlier you start the better.
At Brewin Dolphin, our experts can work with you and your family to develop a tailored education fees plan that can be built into your overall investment strategy. We will do the hard work, building an action plan that makes the most of all your savings and investments to cover education costs in full.
We can help you give your children and grandchildren the best start in life.
Understanding the costs of education
The pressures of going private school fees have soared in recent years. The average overall fee for private education, excluding nursery fees, increased by 3.5% between 2016 and 2017.3 This was the lowest annual increase since 1994, but still outpaced inflation. Average day school fees are now £13.419 a year. The average boarding fee in 2017 was £32,259 a year3, 60% higher than a decade ago. Headline fees are not the whole story. Bespoke school uniforms, musical instruments and potentially expensive school trips can significantly add to the already substantial costs.
The pressures don’t end once your children or grandchildren reach the age of 18. University tuition fees for courses beginning this September are up to £9,250 a year, and few universities charge less than this maximum.There are no tuition fees for Scots studying at Scottish universities, and Welsh and Northern Irish students also pay lower fees for universities in their regions.
However, living costs – accommodation, food and so on – still average £12,160 a year, according to the National Union of Students.State-sponsored loans exist to cover university costs, but that means many students complete their degrees heavily in debt. Interest starts to accrue on the money your child borrows from the moment it arrives in his or her account. Students graduate with average debt of £44,500, according to the Sutton Trust.
While this is lower in Scotland and Wales, students here still emerge with sizeable debts at the start of their working lives. Student loans are not loans in the conventional sense, as repayments are linked to how much the graduate subsequently earns. Unlike a mortgage or bank loan, if isn’t repaid after 30 years it will be written off.
However, during those 30 years, being heavily in debt can severely narrow opportunities. It makes getting on to the property ladder harder, making it more difficult to save for a deposit and get a good-value mortgage. By reducing take-home pay, student debt also hampers the ability to save for the future.
How much will you need to pay?
This is the first question you need to ask when building a school and university finance plan. Given that establishing how much you are likely to need will involve estimating costs, and inflation, sometimes decades in the future, it can seem daunting. But it is necessary if you want to be fully prepared for what is ahead.
If school fees increase by an average of 5% a year, it will mean fees per term could double from the time your child first starts primary school to when they finish sixth form: better to be prepared than potentially put your children’s or grandchildren’s futures in jeopardy.
Our financial planners can help you determine how much you are likely to need, building a picture of annual and overall costs based on likely fee inflation. They can establish an overall target, and work with you to establish a plan to get there.
Faced with a potentially costly overall bill, at this stage you might also want to explore ways to possibly save money. Not going private until secondary school from age 11, or just for sixth form, will significantly cut overall costs. School fees vary considerably depending on the prestige of the establishment and where it is in the country. The average day school in the North West charges £10,101 a year, compared with £16,446 a year in London. Fees tend to be higher for sixth-form schooling than for juniors, as you can see in the chart above. The availability of scholarships and bursaries is also worth investigating. A third of private school pupils receive some help with fees, mostly from the school itself.
Some schools may offer a discount for advanced funding. You may also be able to arrange a sibling discount if you have more than one child at the same school.
Creating a plan that works for you
It is possible to fund education from a number of sources. Which is most suitable for you will depend on your circumstances – on various factors, such as current and potential future earnings, what assets you already have and whether other family members, such as grandparents, would like to help out.
Protect your earnings if paying out of earnings
Paying school fees or university costs out of monthly salary is likely to be a significant burden – they could be your single biggest outgoing, higher even than mortgage costs. The fees may also increase faster than your earnings, making them more of a financial burden over time. However, if you decide this is the best route for you, it is important to consider how you would pay these substantial sums if you lost your job or income. If something unfortunate were to happen, an incapacitating illness or even death, the education of your children could be thrown into doubt.
This means it is sensible to establish some form of financial protection. A range of products play different protection roles - we can advise you which products are most suitable for you.
Making use of existing savings
You may already have sufficient savings to pay for your children’s education costs – in which case the issue is how best to invest these funds to make sure fees are covered not just now but also in the future. Putting your savings to work in the stock market offers the potential for higher returns and typically provides better protection against inflation. However, a key principle of investing is that you should take less risk with money the closer you are to the time when you will need to spend it. As your child prepares to enter the education system, it may be worth holding a few years of fees in cash.
Another source of funds might be an expected inheritance or other sum, for example from a property or business sale. However, it is important to consider how secure these sums are. An expected inheritance from the older generations could be eaten up by care fees, while you might not achieve the selling price you need.
Establishing a dedicated savings plan
Having considered your children’s likely education costs and your ability to pay out of your salary or existing savings, you may well find you have a potential shortfall. Then it is time to establish a decided education savings plan. It is important to get the balance right between investing for growth – to reduce the amount of money you need to contribute – and not taking too much risk.
A danger of investing in the stock market is that the fees become due just after your investments have crashed in value, forcing you to cash in holdings at a low point and making it harder to pay ongoing fees.
At Brewin Dolphin, we aim to ensure that your liquidity needs for major and regular payments such as school fees are built into your investment strategy. Our investment managers can help ensure your investments are appropriate to your needs and risk profile.
Planning ahead and setting up a savings plan when children are young can make covering school and university fees much less onerous. By investing a fixed amount at regular intervals your investment will benefit from ‘pound cost averaging’. This means more shares are purchased when share prices are lower and fewer shares are purchased when prices are higher; to some extent, this should smooth out the highs and lows of stock market investment. The investment returns will also be boosted by compounding the return.
Help from the ‘Grandbank’
Gifting money to your grandchildren to cover school and university fees has the additional benefit of reducing the inheritance tax (IHT) that your offspring will pay. Each tax year you can give away £3,000 and that gift will not be subject to IHT when you die. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.
It is possible to make further tax-free gifts – known as ‘potentially exempt transfers’ – but you have to survive for seven years after making the gift for your estate to get the full benefit.You can give away most assets, including cash, shares and property, but it must be an outright gift from which you can no longer benefit.
One of the dangers of making lifetime gifts is that you hand over money only to regret it later in life when your own finances run short. However, we at Brewin Dolphin can work with you to establish how much wealth you have available to give to younger relatives.We can carry out a cashflow analysis that will help to establish what you might need in later life, what is available now in terms of capital and income and how you might need to invest in order to maintain your lifestyle in the future. We can consider all the options available to you from releasing assets from an ISA, making lifetime gifts out of income or downsizing to free up housing wealth.
Our experts will give you clarity about your current and future situation, giving you the confidence to help your family now.
Thinking in the round
Many families find that the most effective way to fund education costs is a multi-faceted approach combining earnings, funds from existing savings, gifts from grandparents and a dedicated new savings plan. Our financial planners can take the strain and build an education financial plan suited to your individual needs and circumstances, providing you with peace of mind at every stage of the process.
1 Independent Schools Council: ISC Census and Annual Report 2017, 28 April 2017. Average day fee £4,702 per term.
2 UCAS: Undergraduate tuition fees and student loans.
3 Independent Schools Council: ISC Census and Annual Report 2017, 28 April 2017. Average day fee £4,702 per term, average boarding fee £10,753 per term.
4 Independent Schools Council: ISC Census 2007, 4 May 2007. Average boarding fee £6,712 per term.
5 Sutton Trust: Degrees of Debt, April 2016.
6 Independent Schools Council: ISC Census and Annual Report 2017, 28 April 2017. Average day fee in North West £3,367 per term, average day fee in London £5,482 per term.
7 Independent Schools Council: ISC Census and Annual Report 2017, 28 April 2017: 33% of ISC pupils are on a reduced fee.