Martin Lewis: How much should you save for your kids to go to university? (VIDEO)
Update January 2020: We now have a new how much should you save for your child to go to University calculator and my updated parental contribution briefing. Please go there as that’s more up to date than this blog.
This is a warning for parents of all teenagers. Now over 50% of our young people go on to university. And while you commonly hear that you don’t need to pay for that upfront, it’s no longer true - there is a hidden parental contribution.
So whether your young one is 13, 14, 15 or 16, if there is a chance they may need to go to university, the likelihood is you’re going to need to save for it. So I’ve put together a video to run you through how you can work out roughly how much cash you are going to need (based on the situation in England).
A full transcript of the video can be read below:
This is a warning for parents of all teenagers. Now over 50% of our young people go on to university. And while you commonly hear that you don’t need to pay for that upfront, it’s no longer true - there is a hidden parental contribution. So whether your young one is 13, 14, 15 or 16, if there is a chance they may need to go to university, the likelihood is you’re going to need to save for it. And what I want to do today is run you through how you can work out roughly how much cash you are going to need.
Now this isn’t about tuition fees. Tuition fees for first-time UK undergraduates are paid for them by the Student Loan Company and you only repay afterwards if you earn enough - you repay 9% of everything above £25,000 currently. So I’m not going to focus on that - what this is about is the cost of living while you’re there.
And students get a living loan too, but the thing they don’t tell you is it’s means tested, and therefore the gap between the full loan and the amount you get is effectively a parental contribution. Why a parental contribution? Because if they’re under 25, except in very rare circumstances, the means testing is based on family income which is a proxy for saying, “parental income”.
So yes, while they’re old enough to vote, old enough to marry, old enough to die for our country, students under the age 25 under the student finance system are not treated as independent adults.
Now the means testing is based on what’s called your residual income, which is effectively just the total family income before tax minus your pension contributions and a little adjustment if you’ve got another dependent child.
And the impact is huge; the amount of living loan the student gets is reduced from family income of £25,000 and by the time you reach around £60,000 depending on circumstances, the amount they get is halved.
Now you heard me say earlier this is hidden but some of you might know that it is means tested. My problem though is when students receive their living loan letter, it tells them the amount of loan you’re getting: "You’re going to get £5,000 for your living loan." What it doesn’t do though is tell them: "The full loan is £10,000. The reason you are only getting £5,000 is because of that means testing - the gap of £5,000 is effectively the parental contribution."
Now that doesn’t of course mean that all parents are going to be able to afford to give them that money, but at least if we had transparency and clarity on this, then you could have an open discussion with your student offspring - or if you are a student watching this, with your parents - and you could talk about it.
Parents come up to me when I’m doing my TV road shows and say things like: “They’re only getting a £6,000 loan, it’s nowhere near enough!” And they’re not aware that there is actually an official contribution that means they should be getting more.
Now even then that doesn’t mean that the full loan is enough but what we have to do is be honest here. Effectively, parents, you are expected to cough up. If you can’t, you can’t, but at least you need to know it. And by knowing now, if you’ve got teenage offspring, you can plan.
So how much should you be saving? Well if you want to look on the exact impact of the means testing on the living loan you can go to How much the Govt expects you to give your children for university.
But the truth is if you’ve got a 13 or 14 year old, it’s all a bit in the air, the numbers are going to change. So I’ve developed a rule of thumb; I’m going to base it on the living loan for students living away from home in London which is where you get the most and the contribution is the most because you don’t know what’s going to happen yet, so we should look at the worst-case or best-case scenario depending on how you look at it.
Roughly the maximum amount you would need to contribute at the moment based on the parental contribution - you can always give them more - is £5,000 a year. On a 3 year course that would be £15,000.
So if your family income is over around £60,000, start preparing to save £15,000. If your total family income is under £25,000, you don’t need to save anything. If your family income is in the middle, £45,000, you want to be saving around £7,500 for your kids to go to university.
Of course, your income could go up and the loans could go up, so this is just a rule of thumb. But I hope it gives you the scale of magnitude of the cash you will need, and if you’ve got a few years don’t try and pay for it all out of that income. If you can, save now. Good luck!