Saving for student days

Investment companies could provide benefits for families thinking about future education costs.

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With students now heading off to university after fantastic A level results across the UK, there is natural concern about how Covid-19 might affect college life. But in recent times, anxiety about the pandemic has – understandably enough – drowned out the discussion of another serious challenge that most students will face: the need to manage their money and keep student debt under control.

Research published by the AIC provides yet more evidence of how difficult this can be. Parents and students underestimate the scale of the challenge, it shows. While Government statistics suggest the average student completes their university education with debt of £45,000, parents don’t expect their children to borrow anything like this; their expectation, an AIC survey shows, is that kids will end up owing around £25,000. Students themselves are a little more realistic – anticipating a final debt of around £38,000 – but still undershoot.

Are savings falling short?

One result of this mismatch between expectation and reality may be that families aren’t prioritising saving for the cost of university in quite the way they would do if they had a true picture of the numbers. Not everyone is in a position to save more, of course, but many might choose to do so if they had a clearer idea of how much is needed. And every additional penny saved will reduce that final debt figure.

However, it isn’t just how much money you save that matters, but also what form your savings take. In the AIC’s research, almost 60% of families say they have used cash savings accounts to put money by for children’s future education – far fewer have put money into stock market investments.

That’s unfortunate. The evidence of history is that over longer-term periods, stock market investments tend to deliver higher returns than cash savings – often significantly higher returns.

That has certainly been the case in recent times. If you have an 18-year-old child for whom you began saving in 2003, you would have earned an average interest rate of 2.8% a year so far. Assuming you saved £50 a month during that time – so a total of £10,800 in all – you would have amassed a pot worth £14,022. Had you put the same amount into the average investment company over the same period, you would have £37,648.

Safety in numbers

Investment companies are collective investment funds that pool your contributions with those of other savers. Then, a professional manager invests those savings in an agreed pool of investments – most often in the stock market, hence the substantial outperformance compared to cash.

What puts many families off investing in shares is the knowledge that their savings can fall in value as well as rise. But over the longer term, stock markets’ record of delivering superior performance makes it worth putting up with some shorter-term volatility. There are no 18-year periods on record in the last century when you would have lost money by being in UK shares.

Moreover, by investing through a fund such as an investment company, you get some protection from downside risk. You’re not putting all your eggs in one basket, because the fund’s manager builds a portfolio of shares. Plus, you benefit from the manager’s expertise. Saving regularly can also help smooth out performance – in months when the market has fallen, your fixed contribution buys more shares, which gives you a boost as markets recover.

For families just beginning to think about future education costs, these are lessons well worth learning. If you have very young children, or even children starting school this month, rather than university, now is an ideal time to start saving on their behalf. If they do go to college, there is a good chance you’ll be able to help them avoid getting into serious debt; and if they don’t, your savings will be a valuable nest egg they can use for something else – even a deposit on their first home.