AAB Wealth: Help with beginner’s finance for students
Thousands of freshers are about to get their first taste of financial freedom this month as they start university. That means they’re responsible for every spending decision – the good and the bad.
Estimates vary, but research suggests that new graduates are likely to have more than £50,000 of debt on finishing their studies. Even in Scotland – where, of course, tuition is free for home students – rent and general living expenses still mean the university experience is an expensive one.
It’s a lot of debt for young shoulders. Even though much of it comes in the form of student loans, research from this year’s National Student Money Survey shows maintenance loans aren’t enough to cover monthly living costs – falling short by about £340 a month.
As parents, you’re often the first port of call for support.
The lion’s share of living costs
The biggest monthly cost by far is where they live. Rent accounts for around half an average student’s living expenses – and rents have increased nearly 20 per cent over the last year.
Unless you’re studying while living at home, which is now more widespread, especially during the pandemic, this cost is unavoidable. But one solution for parents who can afford it is to buy a property themselves.
There are a number of reasons this can make sense. It can provide you with a second income once your child has graduated, or you can use it to help get your child on the property ladder. Failing that, you can sell it on after all your children have finished university, hopefully benefiting from rising property prices.
However, more punitive charges on second-home ownership mean this option is not as lucrative as it has been in the past. You need to consider other potential complications too – there are additional costs, such as conveyancing, legal fees, and maintenance, as well as the fact that property isn’t as liquid as other investments.
Plan ahead to give your child a university war chest
Many parents will have saved in advance to help fund their child’s education. This takes careful planning. In theory, putting aside £100 or so a month from birth could yield a lump sum that enables your child to graduate debt-free, or at least ease the burden.
There are many ways to do this but perhaps one of the best is putting money into a Junior ISA. These are tax-free savings accounts which allow you to invest up to £9,000 each tax year, in either cash or stocks and shares. The fund is transferred to your child at 18 years of age.
Of course, once the money is theirs, it’s down to them to spend it responsibly. This is why the most important way you can support your child through university is guidance.
The importance of financial education
Around seven out of ten students heading to university wish they’d had more financial education – one in ten has never set a budget.
There is a minefield of tempting offers out there once they start university. Not only credit cards, overdrafts, and bank loans, but also new innovations such as cryptocurrency which promise lucrative returns but come with added risk.
An effective way of approaching better management of personal finances is encouraging them to take out a student loan.
With a maintenance loan paid into their account three times a year, they’ll need to budget to ensure it lasts until the next round. Setting out a spending plan can help keep them on track.
Finding the balance
Raising a child is expensive, costing more than £71,000 from birth to age 18, excluding housing, childcare, or council tax. But it’s the next step that is the trickiest.
There is a fine balance between providing enough support to help your child get the most out of their time at university, while also giving them the financial freedom to carve out their own path. It’s the difference between a helping hand and a handout.
Whether your child is going to university this year or it’s a long way off, speaking to a financial planner can help you include their further education as part of your long-term plans.Richard Johnston is a chartered financial planner at AAB Wealth – find out more here.