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Tuition fees – an attempted explanationSixth formers – and their parents – must have followed the debates on tuition fees with mixed emotions. As was expected, MPs voted to raise the cap on tuition fees from £3,290 to £9,000 a year, and although some institutions may not charge the full £9,000, it looks a racing certainty that the top universities will charge the maximum fee. So students starting a three-year degree in September 2012 – when the new charging structure is to be introduced – could be facing tuition fees alone of £27,000, before any accommodation or living expenses are taken into account. As is the case now, students will be offered loans to cover both tuition fees and maintenance costs. These changes will increase pressure on university places for the academic year 2011–2012. Fewer people are now expected to defer a university place and opt for a gap year, as travelling around Southeast Asia is likely to cost them an extra £18,000 in tuition fees on top of the price of the trip itself.
So who will be better off under the new scheme, as the coalition politicians are keen to explain? And who will pay more, as the student unions are even keener to publicise? Much instead will depend on what graduates go on to earn and how rapidly they progress in their careers. For the average sixth formers or their parents, assuming they want to help, they will have little idea of what job he or she will get, let alone what it is likely to pay – in some minds rather like a stay of execution, particularly as some issues have still to be resolved! Under the government’s proposals, graduates will start repaying their loans only when their earnings reach £21,000 a year – rather than the current threshold of £15,000. Under the current system, graduates earning £16,000, say, will be making monthly repayments towards their student loan, but would pay nothing under the new system. At earnings of £21,500, say, they would pay £52 a month under the current scheme, but just £4 a month under the new scheme. If pay drops back below the £21,000 threshold, repayments will be frozen again. Under the new scheme, loans will be written off after 30 years, rather than 25 years as at present. One of the issues that prospective students need to think about is what would suit them better: to clear their debt quicker, or to keep more of the money they earn when they are starting their careers and are on a lower salary. The government argues that the changes make the new funding arrangements more progressive, with those earning less after university paying less under the new scheme. This could benefit those who go into lower-paid professions such as social work, or work in the voluntary sector, as well as those who take extended leave from paid employment, for example to raise children. Other beneficiaries will be those from the very poorest families, as the government has pledged to increase the number of grants and scholarships available. Again it is a complex system that has been put in place, but in some cases those from the poorest backgrounds will effectively be able to have their fees covered for two years – so they would be borrowing only one year’s fees (£9,000). To help, a new £150 million national scholarships programme is being introduced, which could offer a free first year for students from the most disadvantaged backgrounds – followed, potentially, by a free second year funded by their particular universities. So it isn’t all bad news; there are some advantages to the government’s proposals. For example, student loan entitlement will be calculated in a more simplified fashion, and prospective students will be able to apply for their finances at the same time as their course, ensuring a smoother process for applicants. What is certain, though, is that almost all students, regardless of their family’s background or their earning potential, will have significantly larger debts than they ever had before. Some of them will simply never clear them, so may end up better off as a result. But for those aged 17 or under, and their parents, this is unlikely to bring much comfort. Our country needs world-leading universities to underpin its long-term success and well-being, but with our public finances in such a poor state, we can no longer rely on tax payers to subsidise higher education at current levels. The government’s solution is to ask the chief beneficiaries of higher education – university graduates – to make a greater contribution to the cost of their studies. Graduates can now expect to earn £100,000 more during their lives – net of tax – than someone who leaves school at 18. With many universities charging the maximum tuition fees of £9,000 a year, students can expect to graduate with at least £27,000 of debt. This is likely to be significantly raised if they also borrow money to pay for accommodation fees and living expenses. So what can parents do?
Parents may struggle to build sufficient savings to cover all these costs in full, particularly if their children are already at secondary school. But there are steps they can take that should enable them to make a significant contribution. Start young
If you start saving from birth, you will need to set aside £155 a month to build a £65,000 investment fund by the age of 18, or £240 a month to build £100,000, which should make a reasonable dent in future education costs. If you don’t have as long to save, then the maths becomes scarier: those looking to build a £100,000 fund over ten years need to put aside £590 a month. Start saving
Even if you can’t afford to save this amount a month, it is worth putting what you can into a bank account or investment plan. The returns can be used to cover some education costs, reducing the debt a student graduates with. Take risks
If you have ten years or more to save, consider equity-based plans, which, historically, are likely to deliver superior returns. Remember, though, to diversify holdings where possible, and gradually move funds into safer cash-based investments as GCSEs approach. You don’t want a sudden market correction wiping out an education fund while children are taking their A-levels. Ask for help
Many grandparents and godparents say they would like to help more towards education costs. Grandparents can effectively reduce their inheritance tax liability by making regular gifts out of income, which can either go towards future education costs, or help pay for children’s living expenses for those in higher education. Be realistic
There are steps they can take to minimise debt. These can include taking on part-time work (or work in the holidays) or studying closer to home to reduce accommodation costs. Help with repayments
You might not be able to save enough in advance to pay tuition fees, but there is nothing to stop parents helping with repayments. Remember, students can borrow at far more competitive rates. Once they start earning there is nothing to stop parents covering some or all of the repayments. Some possible implications of higher tuition fees
So what will be the main implications of the fee rise hike? Here are four to mull over.
For those of us who abhorred the rioting and its implications, perhaps this is the kick in the teeth our higher education sector has been needing? |
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