Young, gifted & broke
Going to university offers your children all sorts of opportunities. But with the average student racking up debts of £23,500, according to the National Union of Students, it can also leave them with a significant financial headache.
"It's very tough for students," says Tina Barnard, student financial adviser at Royal Holloway, University of London. "It can be the first time they've lived away from home, and as well as getting to grips with that, they've also got to get their heads around the finances. It's not easy."
Just finding their way around what's available financially can take several weeks of study. For starters, there's the maintenance grant.
This is assessed on parental income, with a full grant of £2,906 awarded to students from households with an income of £25,000 or less. The amount falls as income rises, until parental income exceeds £50,020 and the grant dries up.
On top of this are student loans and, each year, every student in full-time higher education can apply for a tuition fee loan and a maintenance loan.
While the tuition fee loan is worth up to £3,290 in 2010/11, the maintenance loan is determined by household income, as well as where the student lives and studies and which year they're in.
For students from a home where the income is less than £25,000, the maximum loan is £4,950 if they live away from home outside London (£6,928 in London), but as the household income increases the maximum loan will decrease on a sliding scale to £3,564 (£4,988 in London).
The maintenance loan is also scaled back if a maintenance grant is awarded, at the rate of 50p for every pound of maintenance grant.
The loans also need to be repaid, as Will Hoyles, a spokesperson for the National Union of Students, explains: "The interest rate is linked to the retail prices index, which is low, and you don't need to start paying it back until your earnings exceed £15,000 a year.
"But interest is added from the moment the money hits your bank account and, with the earnings link, this means that people who earn less end up paying back more."
Having completed two years studying English language and linguistics at Oxford Brookes University, 22-year-old undergraduate Natalie Torbett transferred to a public relations degree at Leeds Metropolitan University.
"I've been at university for five years, having recently completed a year's placement, and I've taken out £14,000 in student loans. Each month I'm charged between £25 and £30 in interest," she explains.
As well as the loans and grant, it's also worth investigating bursaries and scholarships that are available. These vary between universities and are either means-tested or competitive.
As an example, Royal Holloway has a standard bursary of £750 a year that is means-tested, plus excellence bursaries worth as much as £3,500 a year based on A-level results.
Barnard adds: "For excellence bursaries, details are usually in the pack sent to potential students, but for means-tested ones, it's essential they tick the box on the maintenance grant application form to say they're happy to share financial information."
Charities can also help and Barnard recommends FunderFinder (funderfinder.org.uk) to find potential sources of funding.
Additionally, special awards are often available, sometimes as a result of bequests in wills. As these are often linked to different subjects, details can usually be found through the department.
The 'access to learning fund', commonly known as the 'hardship fund', is also available once the student is already attending university.
This is a discretionary fund from the government that students can apply for if they find they are facing tough times and have taken out a student loan.
Once they are a student, a good solid bank account will form the basis of their finances, so it's important to spend some time comparing features.
Kevin Bray, insight analyst at financial information company Defaqto, warns against letting the incentives, which can include free flights, discounts on computers and mobile phones, and even cash, sway any decision: "These are there to grab attention but over the term of the account you can end up more than paying for them."
Unsurprisingly, given the likelihood of debt, the overdraft is the most important feature. "Ask in the branch about the size and duration of the overdraft facility.
The advertising will quote the maximum, but depending on your credit rating, you might not qualify for this much," adds Bray.
Defaqto's assessment of 83 different features on student accounts resulted in just two achieving its full five star rating – Barclays Student Additions and the Lloyds TSB Student Account.
For overdrafts, Barclays offers an interest-free overdraft of up to £2,000, with a further £1,000 at 8.9%, while Lloyds TSB gives £1,500 interest-free, rising to £2,000 in year four and beyond.
Once the mechanics for organising their finances are in place, it's important to draw up a budget.
Adrian Lowcock, senior investment adviser at Bestinvest, says: "Life as a student will be financially tough and having a budget will help them manage their expenditure by spreading out the cost of living across the whole term. Setting aside money for the essentials – rent, bills and food – is of upmost importance."
The simplest way to put together a budget is to list all the income and then work out where it's going. This will enable limits to be set for the non-essentials such as entertainment and clothes.
Lowcock adds: "Keeping records of spending will make it easier to see where costs can be cut and outgoings reduced."
It's also worth looking on sites such as uSwitch.com and comparethemarket.com to make sure you have the best deals on insurance, utilities and so on.
Natalie says: "Look for cheap deals on internet and mobiles, and always read the small print before taking out the offer. Introductory offers can look great but may be followed with much higher charges."
Getting a part-time job or working through the holidays is a good way to balance the books. This is something Natalie has done throughout her studies, getting jobs through Gumtree, the JobCentre and by contacting local companies.
"I've worked in a working men's club, taught English to Italian students, waitressed and worked for a pie company at eight summer festivals. I'll reduce the amount I work in my final year, but the money's really helped," she says.
Students get exactly the same tax allowance as if they were working - £6,475 a year – so most won't pay tax. However, it is worth keeping an eye on tax as you may need to claim it back from HM Revenue & Customs.
It's also important to balance working with studying. "Part-time work's great but we wouldn't recommend more than 20 hours a week as it can affect your studies," says Barnard.
Even with a job and all the funding in place, borrowing is an inevitable part of student life. When this happens, the interest rate is key, with the cheapest options being interest-free overdrafts, interest-free short loans from the university and the student loan.
At the opposite end of the spectrum are short-term loans offered on websites such as wonga.com and quickquid.co.uk, which can have four-figure APRs.
It's also important to weigh up the repayment options, channelling money to clear the more expensive debts first.
Many parents also make financial provision to help their children survive university. "I see a lot of parents who are planning ahead for their children's university education," says Nicholas O'Shea, director at Canterbury-based independent financial advisers Pharon.
"I've have been putting aside my children's child benefit myself, so they'll have some money to help them through."
All manner of saving and investment vehicles can be used for university, from savings accounts, cash and stocks and shares individual savings accounts, and other investment products through to more exotic, higher-risk products such as venture capital trusts and enterprise investment schemes.
For more information see this month's free Investing for Children supplement. Your choice will depend on your timeframe, the amount of money at stake and your attitude to risk.
Some parents also consider buying property while their offspring are at university, allowing them to live in it and cover the mortgage with rent from friends.
Although the long-term nature of property investments means you'll need to think beyond the time your child is at university, this can have significant tax benefits.
Ronnie Ludwig, partner in the private wealth group at Saffery Champness, says one of the most tax-efficient ways to structure this is to gift 1% of the ownership of the property to your child.
"You can then enter into a partnership agreement allocating 100% of the profits from letting the property to their child. This income will be assessed on the child, resulting in zero or minimal tax," he explains.
Grandparents can also help; many treat it as part of their inheritance tax planning by using the exemptions. These include gifts of up to £3,000 a year and gifts that are normal expenditure out of income.
"It makes sense to do this, especially as they get to see their grandchildren enjoy the money now," says O'Shea.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.