This year’s intake of university students will accumulate around £45,000 of debt, on average, by the time they finish their studies, according to the government1. Many will doubtless accumulate a lot more.
Mercifully, the loans – which will be used to pay for tuition fees and upkeep costs – don’t have to be repaid until students earn above a certain threshold 2. They are also written off after 30 years, including any interest left unpaid, although this is due to change soon 3. So it’s likely that some students will never pay them back.
However, many students will have to, including potentially your children. In future, the government expects more than half of all future university students to repay their student debt in full4, which is quite a burden on a young person’s shoulders so early on in their careers.
It’s the sort of thing that might put them off higher education altogether. In later years, it might also make it harder for them to leave the family home.
So what can you, as a parent, do to lighten their potential load? Well, one solution is to open a junior individual savings account (or Junior ISA) and use it to invest in the world’s stock markets on their behalf. There is of course the risk that by investing in the stock market, the value of the investment may fall or rise and you (or your children) may get back less than you invested. Over time, though, there is the potential to build some capital that your children can later use to pay down their student debt.
And the earlier in their lives you begin doing this, the bigger the potential difference you could make to your children.
Some basic maths
To demonstrate how, let’s imagine that you want to build up a big-enough savings pot to give your children the opportunity to start their careers with zero student debt. How much would you need to invest each month to achieve this goal?
Now, given the unusual nature of student debt – the fact the repayment terms are more manageable than with other forms of debt – it may be that there are better uses for this money by the time someone graduates. But for argument’s sake, let’s imagine what the average debt burden might be for students born in 2022.
Let’s factor in some inflation too – say, 2% to 3%. (Although dwarfed by current inflation levels, it’s more than our economists expect in longer term).
On that basis, we would expect £45,000 to be more like £63,000 to £75,000 by the year 2040. And to get to this level by the time a new-born reaches 18, we calculate that mum and/or dad would need to put away between £180 to £220 a month5.
If you can’t aim this high, don’t worry, because smaller amounts of regular saving could also have a seriously positive impact on your child’s future. Just £30 a month under the same assumptions would grow to more than £10,000 over 18 years6.
The annual Junior ISA allowance is £9,000 – so there’s plenty of wiggle room for extra contributions!
Of course, inheriting a large sum of money at a young age is quite a responsibility and not something all parents will be comfortable with. Once a child turns 18, control of the Junior ISA passes automatically over to them.
And whether they go on to university or not is an individual choice they may not want to make or, indeed, an endeavour they may yet not be suited to.
But whatever their decision, you will at least have the comfort of knowing that you have made provisions to ensure your children have the best possible start to adult life. Student debt aside, the money could yet form part of a future house deposit or help them to travel and see the world.
Investing regularly through Junior ISAs may also encourage you to speak to your children about being smart with their money and planning their finances, so they pick up good habits that could help them deeper into adulthood.
1 For students in England, it’s £45,800 for those who enrolled in 2021/22 but seen slipping slightly to £43,400 for those scheduled to start in 2023/24. ‘Student loan statistics’, House of Commons Library, 19 July, 2022.
2 It’s currently £27,295 per year for most students enrolled since 2012 but is due to fall to £25,000 from September 2023. For more, see ‘Repaying your student loan’.
3 It’s 25 years if you took the loan out between September 2005 and September 2012 and becomes 40 years from the next academic year, under current government proposals.
4 ‘Student loan statistics’, House of Commons Library, 19 July, 2022.
5, 6 Assuming an average rate of return on their Junior ISA investments of 5%.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.
This article is designed for use by, and is directed only at, persons resident in the UK.
If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
The information contained in this article is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
© 2022 Vanguard Asset Management Limited. All rights reserved.