My inbox has just been dirtied by a terrible press release from giant finance company Fidelity. It latches onto people’s misunderstandings about student finance to flog its junior ISA product. So I’ve quickly bashed out this blog to explain.
Here is the release…
£125 A MONTH FOR YOUR CHILD TO FINISH UNIVERSITY DEBT-FREE
As the nation’s 18-year-olds receive their A-level results this week, many will be looking forward to going to university. They will be less enthusiastic about the resulting debt they are likely to face when they graduate three years later, which could be up to £27,000 from tuition fees alone. While it may be too late to reduce this burden for those about to start further education, it’s never too early for those parents of younger children to think about how they can start to prepare.
Chris Davies, Head of Fidelity Wealth, Fidelity comments: "Saving into a junior ISA is a great way of spreading the cost of university across the first 18 years of your child’s life. It will be a lot easier to fund a university place for your child if you start early rather than trying to come up with a lump sum later down the line.
"Fidelity calculates that an investment of £125 a month could provide the estimated £27,000 to cover the cost of university for your child (with a bit left over so they can buy you a thank you gift when they leave home!).
"Even if you only put aside £50 a month, the magic of compounding means that after 18 years you could have built up a fund of nearly £15,000 which would make a decent contribution to the cost of further education."
Now some of you may be thinking: what’s wrong with that? I, of course, strongly support the savings principle, and would encourage the debt-free to put money away for their family’s future.
Yet this release is tied to the concept that parents should be "trying to come up with a lump sum later down the line". That is a misunderstanding of how student finance works, along with junior ISAs to boot.
Why this is so wrong about student finance
I’m going to summarise it below, but you’d be far better off reading my Beware Paying Tuition Fees Upfront and 23 Things You Need To Know About Student Loans guides, which explain this in more detail.
No students or parents need to repay student loans upfront. Only after university must graduates who earn enough repay them. In fact, they pay 9% of everything earned over £21,000. This lasts until the amount borrowed, plus interest, is repaid, or more likely until it wipes out after 30 years.
There are many who, whether due to low-paid jobs, working for charities, or becoming homemakers, will never repay a penny. There are millions, who while they will repay something, will never get close to repaying what they borrow in full, because they won’t earn enough.
For all these people, paying a loan upfront that you’d never need to repay in full means throwing £1,000s or £10,000s away. If you’re thinking this means people are welching on their debts, that’s not true either. The system is designed so those who financially gain from their education pay for it, those that don’t pay less or nowt.
Of course, there is a chance the system may change by the time today’s one-year-olds go to university. Planning for them to have put money aside isn’t a bad thing – yet the messaging here is clearly about fear, based on ignorance of the current system. I’d expect a giant financial company to know better.
Junior ISAs are a risky way to save for tuition fees
The other big point it misses in its attempt to sell you a junior ISA (see the full Junior ISA guide for full pros and cons), is that money in a junior ISA is your child’s, not yours.
That means you can’t "save for something", you can only save. So if you did put money into a junior ISA for your child to repay the future system of student funding, once they hit 18 they could decide to spend it on a trip to Ibiza for all their friends instead. You can’t stop them.