As university courses restart, many students will be heading away from home for the first time. Deciding how best to fund your child’s further education can be difficult.
Recent figures suggest that the average value of a Junior ISA (JISA) at age 17 is just over £19,000, while the average undergraduate debt after a three-year course is closer to £38,000.
Adding to this problem is the fact that many children and parents are underestimating the size of their child’s potential debt. Association of Investment Companies (AIC) research suggests parents estimate debt at below £25,000.
Boolers can help you make the most of your child’s investment, so keep reading to find out why paying university fees upfront might not be the best choice.
Building a JISA investment
What is a JISA?
A JISA is available to UK residents under the age of 18 and they are a great way to build wealth, giving your child a good financial start in life. Once a parent has set up a JISA, then both parents and grandparents can invest on the child’s behalf and benefit from the JISA’s tax efficiencies.
Interest earned from a Junior Cash ISA is tax-free, while any gains you make on investments in a Junior Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).
Starting a JISA when your child is born and paying as much as you can afford each year – the maximum is £9,000 for the 2021/22 tax year – can provide a sizeable pot by the time your child reaches age 17.
Cash versus Stocks and Shares JISA
Cash JISAs, although popular, are a less enticing prospect currently due to low rates of interest on savings. Rising inflation is compounding the problem. Cash held in a JISA will struggle to keep pace with inflation and is therefore effectively losing value in real terms.
Investing in the stock market through a Stocks and Shares JISA provides a chance to beat inflation, but this comes with added risk. The amount you invest can fall as well as rise.
Boolers can help you decide on the best and most tax-efficient way to help your child save for their future, so get in touch.
What happens at age 18?
As your child approaches adulthood, they gain more control over the money held in their JISA. They can start managing their account from the age of 16 and can withdraw from it from age 18.
While this could be the perfect time for your child to withdraw funds to pay for their further education, this might not be the preferred – or even the right – option.
Money that remains in a JISA after the age of 18 will convert to an adult ISA – either a Cash or Stocks and Shares ISA, dependant on the JISA previously held. ISAs have the same tax efficiencies as JISAs, but the annual subscription limit increases from £9,000 to £20,000.
The pros and cons of paying university fees outright
How a student loan works
Tuition fees for UK undergraduates cost a maximum of £9,250 a year, meaning a debt of nearly £28,000 after a three-year course, with maintenance costs on top.
The Student Loans Company requires your child to begin paying back their debt in the April after they graduate, but only if they earn above a threshold amount.
For those students starting university in 2021 with a “plan 2” student loan (one taken out from September 2012 onwards), this threshold amount is £27,295 a year. Once your child’s income exceeds the threshold, they pay a percentage of the amount above that threshold.
Many graduates won’t begin to pay back their loan straight away, while others may never repay it in full. The debt is written off after 30 years.
Pros of paying tuition fees outright
If you can afford to pay your child’s fees upfront, or you have amassed a sufficient JISA investment to cover the cost, your child will graduate without the burden of a student loan.
If they are leaving university and heading straight into a well-paid job – one which means they’d start paying back their loan immediately – their take-home pay won’t be eaten up by loan repayments.
Cons of paying tuition fees outright
Even for a child going into a high-paying job straight from university, paying off tuition fees might not be the best option.
The tax efficiencies of an ISA and the benefits of compound growth mean that remaining invested, allowing the fund longer to grow, might be a better long-term plan.
With the interest on a student loan low, making small repayments while saving towards a house deposit, for example, might be a better use of the funds.
Equally, teaching your child to pay their future selves first by contributing to a pension will help them to build the foundations of a stable financial future.
Get in touch
A JISA investment is a great way to begin accumulating wealth for your child’s future, but the value of a long-term investment shouldn’t be underestimated.
Using the money to pay for further education might not be the best way to use the funds, but the right answer will be different for everyone.
Boolers can help you make the right choice for you and your child. If you would like to discuss investing in your child’s future, please contact us today.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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