Debt warning for new university students
Thousands of A Level students have received their long-awaited A Level results and have discovered if they have secured a place at their chosen university or college.
But in the midst of their excitement, financial advisers are warning that undergraduates face high levels of debt by the time they graduate.
The costs of a degree have rocketed in recent years, with a recent LV= survey estimating the average student debt upon graduation at £53,330, including tuition fee loans, maintenance loans and overdrafts.
Jason Hollands, managing director at Bestinvest said: "Many students are leaving higher education with significant debt and faced with a tough jobs market. The government's own statistics suggest around 70% of students who started university last year will end up repaying between £65,000 and £85,000 once interest costs are factored in but for some it may be much higher.
"That's a sobering thought when official statistics claim the benefit of a degree is on average worth £100k in earnings over a lifetime compared to those of a non-graduate. In financial terms at least, the case for an "average degree" may not be convincing."
Advisers claim that parents of younger children must start investing as soon as possible if they are to help avoid such huge sums of debt.
Based on an assumption of achieving an average return of 5%, net of charges, each year you would need to invest £1,700 a year for 18 years to generate around £50,000. But if you add in inflation at an average 3%, you'd actually need to invest £2,900 a year.
According to the Association of Investment Companies (AIC), a £1,000 lump sum invested in the average investment company over the last 18 years (1995 to 2013) has grown to £4,243. Over the same time frame, a £50 a month investment has grown to £26,284.
Hollands says that for many parents, the first port of call for building a savings pot will be a Junior ISA. "Given the long term nature of Junior ISAs, parents investing for very young children should focus on equity funds. These are likely to have a high degree of volatility but offer the potential for greater returns.
"One option would be to split the Junior ISA between a global equity fund focused on developed markets, such as Aberdeen World Equity, and an emerging market fund, such as JP Morgan Global Emerging Markets Investment Trust. "Alternatively, you may consider investing in a diversified global investment trusts such as Edinburgh Worldwide, Scottish Mortgage IT or RIT Capital Partners."
However, children can get their hands on the entire Junior Isa pot when they hit 18, so some parents may wish to use their own adult stocks and shares Isa allowance to save – this is worth £11,520 in the current tax year.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
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).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.