This year’s new freshers are just thinking about packing their bags for university, but how much debt will your children build up during their uni years? Most parents are optimistic in their thinking about the borrowing their kids will take on – a survey just published by the AIC found parents, on average, expect students to finish university owing around £24,000. Students themselves are more realistic, putting the figure at around £38,000. The Institute of Fiscal Studies, meanwhile, suggests £50,000 is an appropriate guess.
These are large sums of money by anyone’s standards. But while many families will struggle to avoid their student offspring having to take on at least some debt in their college years, careful planning ahead can reduce the burden. Start saving early enough – even with small sums – and you will have a significant sum with which to at least make a contribution to university costs by the time your children are ready to fly the nest.
How to save
The most crucial point to grasp about saving for children’s future is that this is a long-term endeavour. If you start saving when your children are still toddlers, you’ll have more than 15 years to build up a chunk of money they can draw on when they’re ready to leave for university.
This is important. Too many families with good intentions about savings opt to put money in a bank or building society savings account. The returns on offer from cash savings in this low interest rate environment are miserly, but even during periods when rates are higher, other types of investment tend to outperform.
Above all, history shows that the stock market tends to deliver the best returns over longer periods – say more than 10 years. The value of your savings may move up and down in the short term but, over time, there’s a good chance of you doing much better than you would in the bank.
Some numbers tell the story more effectively. Imagine depositing £25 each month in a cash savings account paying 2 per cent annual interest; at the end of 18 years, you would have a lump sum worth £6,540. Now imagine you’re putting the same money into the stock market and earning 5 per cent, which is the medium-level of returns that financial regulators tell the financial services industry to use when making projections about investment performance. Over the same period, you’d end up with a lump sum worth £8,828 – over £2,000 more than with the cash savings.
How, then, to get that stock market exposure? Well, for most people, investing direct on the stock market is intimidating – or too time-consuming. A collective investment fund, run by a professional fund manager, is a better option.
There is plenty of choice, but investment companies offer a convenient route into the market and have tended to outperform other types of stock market funds over the past two decades, at least on average. Most investment companies offer regular savings schemes, allowing you to deposit as little as £25 a month. They also provide facilities for holding the investment in your name, or the name of your child, as you prefer.
What could you expect from such an investment? The AIC’s figures show that a £25 monthly investment in the average investment company over the past 18 years would have netted you a final lump sum of £17,562 – enough to make a considerable dent in a student’s debt. Had you invested £50 a month, you would have built up a savings pot worth £35,125, or £70,250 if you’d contributed £100 a month.
No one knows how the future will pan out – and returns will vary in future. It’s also the case, of course, that your children may choose not to go to university – or that the funding system will look different by the time they reach that stage of their lives. Still, there’s nothing forcing you to use these savings for education – they might be a useful contribution to a deposit on a first home, for example. Save early and even if you’re saving small, the benefits will be large.