University is more expensive than ever. Nowadays, most charge the maximum £9,250 and, depending on parents’ income, students can borrow up to £11,354 to cover living expenditure if they live in London, £8,700 outside of the capital and £7,324 if living at home (2018 / 2019 academic year)
However, this ‘maintenance loan’ is considerably reduced if parents are medium or high earners. For instance, if a student’s household income is £70,000, they will be able to borrow just £4,054 to live off for a whole year outside of London (2016-2018 starters). Of course, they can supplement this by working around their degree, but if they feel pressured to earn, it might be difficult for them to find an appropriate work-life balance.
Because of this, it is likely that they will require some form of financial support whilst at university. How and how much is the question.
Option 1: Putting money towards their university costs
Using the example of parents who jointly earn £70,000, and assuming the student’s university charges full fees, over the course of a 3 year course, this could amount to around £40,000 of eventual debt.
As it stands, repayments on student loans are taken as 9% of earnings over £21,000. A report by the Sutton Trust concluded that many of today’s students will be paying off their debt into their 40s and 50s.
Living costs for a student, including rent, are about £11,000 per year outside of London. Of course, students should be able to earn about £3,000 per year by working in the holidays.
For the child of the parents who earn £70k, this means that there is a shortfall of about £4,000 a year. If a parent or grandparent could afford to cover it this would obviously be of great help to the student.
For those parents or grandparents with larger savings or assets, covering the entire cost of a student’s studies could be a possibility. However, it is an option that carries a hefty price tag.
The total cost of university is roughly £60,000, including living costs and tuition fees, so to cover their tuition fees, rent and living costs, you’ll have to come up with £20,000 each year.
Option 2: Investing in a buy-to-let property on their behalf
If your child / grandchild is going to attend university in London, then property prices are incredibly high so buying there may not be possible.
However, if they are going to a university outside the capital – excluding Brighton, Bristol, Edinburgh, Cambridge and Oxford where prices are also high – buying a property with a deposit of less than £60,000 is a feasible option.
So, by putting a £60,000 deposit on a property and borrowing the rest, your child / grandchild and fellow tenants could pay enough rent to cover the mortgage costs. However, there are several downsides to doing this.
Assuming you own your own property, by buying a second you will pay the higher rate of stamp duty. On a £160,000 property this would be £5,500 (2018/19).
What’s more, if you are a higher rate taxpayer, changes that apply from this year mean you will no longer be able to claim tax relief on their mortgage interest. You will effectively be taxed on interest you pay to the bank.
To get around this, putting the property in your child / grandchild’s name might seem like the ideal solution.
However, this would complicate things in terms of getting a mortgage in the first place. Buy-to-let lenders increasingly take borrowers’ non-rental income into consideration when providing a mortgage. Considering your child / grandchild will have little income if they are straight out of school or college, this could put a spanner in the works.
Another risk is that house prices may fall in the area you’ve purchased the property or that mortgaging becomes more expensive or complicated as time passes. In short, you have to take on all the risks that come with owning a buy-to-let property.
Ultimately, it comes down to your evaluation of your child / grandchild’s individual circumstances. Would a debt-free life post-graduation suit them best, or do you think they would be better suited by having the stability of already owning a house, which they could fall back on if they face any uncertain times during their future?
The answer to this question could prove a valuable guide in any eventual decision to invest in your child / grandchild’s future.
This information is for guidance only and does not constitute specific advice. References to tax / tax relief are based on our current understanding of current HM Revenue & Customs practice (October 2018), which may be subject to change. The amounts quoted are the maximum amounts that could be applied for and are not necessarily what could be given. The numbers vary from Wales, Scotland, Northern Ireland and the EU, with household income ultimately dictating your entitlement. Property Purchase is considered a higher risk product due to taxes, liquidity and fluctuating markets. Investors should be aware that they may not get back the amount that they originally invested. Brunsdon is not responsible for the content of third party websites .