A lesson in funding for universities

Mark Peters, retail pensions and investment director at Zurich UK Life, outlines the new rules on tuition fees and strategies advisers can suggest to potential students.

Anyone with dependents who are considering going to university has now been forced to confront the issue of how they will pay for it, as whatever the final cost of ­tuition fees and living expenses, there is likely to be a hefty price tag attached.

Although there has been a great deal of argument and debate about what the increase to university fee funding will mean for students and their families, the controversy has often obscured the facts. So it is important to shed some light on what is likely to happen.

Assuming that the bill to increase university fees becomes law, from September 2012 the cap on tuition fees will rise from the current £3,290 to a basic £6,000, and up to a cap of £9,000 conditionally on extra support services for disadvantaged students (what this means in practice remains to be seen). The lessons of the past suggest that fees will rise swiftly to the upper limit (as students have tended to perceive ‘cut price’ courses as poorer value).

Tuition fee loans

No tuition fees will be paid up-front, because these will be funded by tuition fee loans and paid on the students’ behalf to the institution they are attending. Once the student is in work and has a job paying more than £21,000 (currently the level is set at £15,000), they will start to repay the loan, at the rate of 9% of income above this threshold.

A real rate of interest will also be charged at this point, rising with salary to a maximum of inflation (RPI) plus 3% for earnings of £41,000 or more: this is much higher than at present and closer to commercial rates. The debt will be written off after 30 years (currently 25 years). There will also be an early repayment penalty to deter high earners from paying their way out of the loan.

Scottish and Welsh students

The government says that one-quarter of students will pay less in repayments than at present, which means, of course, that three-quarters will pay more. It is a different story in Scotland, where home students pay no fees at Scottish universities, an arrangement set to continue, at least for now. Students from Wales will have fees above the current cap subsidised by the Welsh Assembly Government, wherever they study.

For students in Northern Ireland, who pay slightly lower fees at present, their future funding arrangements are currently being reviewed. There is some debate, however, as to whether such regional concessions will remain affordable in the longer term.

While the details remain to be finalised, the hard fact remains that the cost of going to university will rise significantly, even if the cost of tuition is borne later and longer. According to recent surveys, the average end of course debt for a student starting this autumn is likely to be £24,700. With tuition fees doubling or almost trebling in some circumstances, and, once variables such as interest rates and the range of methods of repayment are factored in, this could easily top £30,000 in the future.

Financial planning advice is therefore essential, both to ensure action is taken in advance to maximise savings and use of investment wrappers, and to maximise ways to mitigate any liabilities to up-front costs.

Advisers are well placed to look at the big picture and seek out long-term, cost-effective strategies to help potential students who may be put off by stark headlines about the costs of higher education.

Saving strategies

So what are the options that advisers can suggest? The key is to save as much as possible over the time available to enable those for whom university is a distant hope, to have the best prospects of building up a sizeable fund. Investing either a regular amount and/or a lump sum into an ISA or mutual funds can build up a sizeable sum in a tax-efficient manner.

It may be that grandparents have capacity to offer support and can make use of investment bonds (written in trust) to gift the money for up-front fees. Not only do investment bonds allow a tax-deferred withdrawal facility, but they are also effectively split (or segmented) into many smaller policies.

For example, £100,000 could be split into 1,000 policies, with each being assigned to a beneficiary over time, such as their student grandchild. The key is to make the most of tax-free allowances. Such options can also perform an important role in inheritance tax planning.

There are also likely to be new savings vehicles aimed at saving for children, for example Junior ISAs, particularly now that Child Trust Fund (CTF) payments are being stopped (although those who already have a CTF will be allowed to continue to use it for tax-free investment, with access to the fund when the child turns 18).

But what are the options if that amount of investment capital is not available, or when time is too short for pre-emptive saving to raise enough? While it remains crucial to save, it is also worth making use of various ways to minimise tax liability and, where applicable, retain the right to claim Child Benefit until age 19 if in full-time education by avoiding liability to higher rate tax (HRT).

Unearned income can be minimised for tax purposes by using ISA allowances (doubled when combined with a spouse/civil partner), re-investment in an onshore or offshore bond or switching to non-yielding mutual funds. Where income is earned, it may be possible to fall under the HRT threshold by opting for salary sacrifice in exchange for benefits, including a company pension, car and holiday, or to opt for charitable giving. If all else fails, the student may be left looking for a part-time job, as an increasing number are.

Because parental earnings also determine the level of funding available for maintenance (living expenses), it is worth knowing that means-tested maintenance grants, non-repayable and on a tapered scale, are available for those students whose parents earn up to £50,020, with a full grant of a proposed £3,250 for those who earn less than £25,000 per annum.

The greater the level of grant, the less would need to be borrowed as a main­tenance loan, but in addition, the total amount of combined grant and loan is at its greatest for those earning under £25,000. This may be particularly applicable to those either reliant on unearned income or who are paid a smaller amount in terms of salary, such as those receiving money in company dividends.

Whatever the exact circumstances, it is vital to look at the income and tax environment as a whole, and be in a position to offer tailored advice based on client’s individual circumstances. It is also important to be informed of the full details of the proposed funding scheme. With so many changes, and the level of both information and misinformation that is abound, advisers can play a vital, ongoing role in planning provision for students and their extended families.