Strategies for student support
The summer is drawing to a close and a new tranche of students is about to head off to university, facing newfound freedom and cheap food – as well as financial pressures their parents can only imagine.
Student loans may be cheap money, but they mount up to a millstone of debt over three years or more.
The university research site www.push.co.uk reports that the average student graduating in July 2011 will leave university with more than £21,000 of debt, and that figure is set to rise year on year.
Of course, parents with enough money may well try to help out: according to recent research into attitudes to student debt from the Association of Investment Companies, around 25% of parents in England reckon they are or will be the main source of funding for their child's university education. But that becomes progressively harder as the costs involved spiral.
Those with the wherewithal and foresight to put a bit away on a regular basis from their children's early years are in a relatively strong position.
But rocky stock markets and low savings rates over the past couple of years mean those with kids leaving for pastures new in the next year or two are likely to find their 'university funds' are smaller than they'd hoped.
Moreover, the AIC research shows that the recession is making it harder for parents to earmark cash for their kids' educations.
So what can parents do to help their children keep student debts to a minimum without jeopardising their own finances? Despite the setbacks, there are several levels at which they may be able to help.
Assistance in selecting the most appropriate student bank account could be a good start. "As most students spend their university life living in their overdraft, it is worth finding an account that offers a good overdraft level interest-free," says Michelle Slade, a spokesperson at www.moneyfacts.co.uk.
Interest-free overdraft limits on student accounts vary considerably between banks, from as little as £1,000 to £3,000. Andrew Hagger of www.moneynet.co.uk points out that this can make quite a difference in cost terms.
"If you could borrow an additional £1,000 interest-free, this would save you £99 a year, compared with a student bank account charging you interest at 9.9% for authorised borrowing. Over the course of your life at college, that could save you almost £500," he says.
However, Slade warns that many accounts, including those from Santander, NatWest and HSBC, operate a tiered system, with interest-free limits rising progressively over several years and the highest levels only accessible to fourth and fifth year students – not much use for this year's intake.
They may also be credit scored at higher overdraft levels, so students with less than perfect credit records end up with a lower limit.
Both Hagger and Slade pick out Halifax's offering, which tops the interest-free overdraft tables with up to £3,000 available from year one. As an alternative, Barclays offers up to £2,000 from the outset.
Parents may also take a more objective view of the plethora of gizmos and giveaways dangled by the banks to tempt students into taking their business to them. Basically, these should be ignored.
They should be seen as a perk, rather than a reason for selecting the account, emphasises Slade. The one possible exception to the rule could be NatWest's five-year young person's railcard, worth £130, adds Hagger.
Student loan scheme
What about the government's student loan scheme? This provides loans of up to £10,153 a year, with interest set by the Student Loans Company each September at either March's retail price inflation or the Bank of England base rate (0.5%) plus 1%, whichever is lower.
This past year has seen 0% rates because the Retail Prices Index was in negative territory in March 2009, but that is likely to change for the coming academic year.
The RPI was 4.4% in March 2010, so it's likely that loan interest will be fixed (on the base-rate basis) at 1.5% this September.
Still, this is very, very cheap. As Tim Moss, head of loans at www.moneysupermarket.com, points out, the only way students could get anything approaching such a good deal on borrowings would be to juggle their debts on 0% credit cards. And most of them have better things to do.
Cheap student loans also open up some potential for parents with spare cash to help generate a little extra for their kids.
Say a student takes out the maximum loan at 1.5% but (because of a part-time job, other savings or parental subsidies) doesn't need to use all the money (or possibly even any of it).
It could be invested in a higher-earning fixed-term bond that pays off the interest and leaves something over.
The best three-year fixed-rate bonds are currently paying more than 4%, and for most students there would be no tax to pay on the interest earned.
"Even if students will need most of the loan during the year, it's worth them putting what they don't use immediately into a decent savings account rather than keeping it in a current account, because these don't pay anything at all," says Slade.
The best instant access cash Isas are paying around 2.7%. It won't go far, but it's better than nothing.
Parents may also be able to help cut their children's living costs in various ways. For example, says Hagger: "It's likely to be cheaper for them if you are able to put their belongings on your contents insurance policy under the “away from home” cover. But do check with the insurer."
"If parents have a reward card with a supermarket such as Sainsbury's or Tesco, they could register a second card for the student. Then as the parents build up points on their grocery and petrol spends, the child can deduct them against grocery bills," suggests Slade.
Reward card points can be boosted further if parents also use the supermarket's credit card when they shop there.
Better-off parents may be able to help in a considerably more substantial way – and improve their own tax standing into the bargain – by investing in a residential property.
As Ronnie Ludwig, partner in the accountancy group Saffery Champness, explains: "Parents should consider purchasing a house and gifting 1% of the ownership of the property to their child. They can then enter into a partnership agreement allocating their child 100% of the profits from letting the property.
"This income, which can be used to pay for fees and subsistence, will be treated as the student's for tax purposes, and as they are unlikely to have significant other earnings this will result in minimal or no tax."
Typically, says Ludwig, parents buy in the town or city where their child is studying, so that the child can live there for free. But that doesn't have to be the way it is. "The investment property could be anywhere at all.
"Indeed, it could be an existing holiday property or second home the family already owns. The key thing is the partnership agreement, which channels the rental profits to the child," he stresses.
Ludwig adds that any gains made when the property is sold will be subject to capital gains tax, resulting in a top tax rate of 28%. "If the money were invested in an income-generating product, it could be taxed at a rate of up to 50%," he points out.
However, cash purchases are way beyond the means of most parents, and buy-to-let mortgage lenders have become much more stringent in their requirements over the past two years.
"Parents will need a decent deposit of at least 25% and will probably have to demonstrate that they don't need to rely on rental income to cover the mortgage," says Hagger.
"Against that, there is a shortage of good-quality student accommodation and you should be able to get tenants quite easily."
He picks out Nottingham Building Society's 4.59% variable rate and Halifax's 5.89% two-year fix as good deals in the current market.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
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.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.