The cost of university education – and how to reduce the burden

Summer’s over and many students are heading off to university for the first time. It’s an exciting time but one that’s laden with massive financial implications. University is an expensive business, and that’s why the decision to embark on undergraduate study requires careful consideration. Budding students need to work out how much their studies will cost. How much debt they’ll be left with. And whether the accumulated debt will be a worthwhile cost of securing better job prospects in the long run. 

Assuming a three-year degree course, research from the National Student Money Survey estimates that the total cost of undergraduate study is about £68,349 – or £22,783 a year.  This figure comprises both tuition fees (typically around £9,535 a year, except for Scottish students studying in Scotland who have free tuition) and living costs, the latter largely comprising accommodation, groceries and transport bills. These are eye-watering numbers.

Graduate jobs = higher skilled roles

The good news is that the decision to embark on a university degree seems to deliver better career prospects in the long term. The proportion of UK graduates in full time work 15 months after they leave university is 59%, substantially higher than the broader youth employment rate of 51%. And graduate jobs tend to be in higher skilled roles. An even more compelling statistic shows that by the age of 31, graduates earn around a third more than those non-graduates who could have gone to university but decided not to. So, the argument for embarking on a university education is quite compelling but choosing the right course and one which can deliver the best graduate job prospects is crucial.

In terms of the spiralling costs of higher education, 2015 was a pivotal year. That’s when Chancellor George Osborne announced that student grants would be replaced by student loans. Ten years on, the scale of student loans in England is startling, with Government statistics showing that around £21 billion per year is lent to around 1.5 million higher education students. By the end of the 2024/25 academic year, outstanding student debt in England was around £270 billion. And at an individual student level, the average outstanding debt among borrowers in England who finished their course in 2024 was a sobering £53,000. 

With growing awareness of student debt levels, it is natural for the older generation to want to do all it can for the younger as they embark on their higher education journey. Many parents – particularly those with larger families – may struggle to cover higher education costs for their children as they leave the family nest. However, planning ahead to give children a financial head start (and avoid or reduce the financial burden of higher education) is becoming increasingly common.

The ’Bank of Mum and Dad’

The ‘Bank of Mum and Dad’ is a term increasingly mentioned in recent years: some lucky children have parents (and caring grandparents) who are wealthy enough or who have planned ahead to secure a financially comfortable future for their loved ones. The Financial Times estimates that only 5% of students will escape the headache of student debt when they graduate because their tuition fees will have been paid for by their parents. However, far more than 5% will be doing what they can to at least reduce this debt burden.

For parents concerned about just how their children are going to be able to advance their studies, investing from an early age on their behalf makes a lot of sense. A personal nest egg accumulated during childhood could be a game-changer in the longer term, providing your youngsters with funding to achieve key milestones of adulthood, for example, higher education, driving lessons and a car or a deposit on their first home.

Student debt statistics make depressing reading but starting to save early for the young people in your own life can make a huge difference. Not only does it mean more time to make contributions, but it also allows the compounding process more time to work its magic, with the potential for reinvested returns generating additional growth over time.

To give an idea of the power of compound growth, let’s say you invest £100 a month into an investment account that manages to return an average 5% per annum for your child from their birth. After nine years, the fund will be worth £13,661. But if you continue for another nine years until their 18th birthday, it will more than double to over £35,000.

A slightly higher-risk fund potentially producing higher returns can make a considerable difference over the long term too. In the example above, if you opt for a fund that manages to achieve total annual returns averaging 7% instead, the account could be worth more than £43,000 after 18 years.

Of course, as with any form of investing, these numbers aren't guaranteed, but the examples serve to underline that while it’s quite possible to set up a minimal-risk cash savings account for a child, for this type of longer term goal, it makes more sense to set up an investment account that gives exposure to the stock market, where inflation-beating returns are most likely to be achieved.

The Barclays Equity Gilt Study for 2024 shows that over the past 10 and 20 years, UK equities have outperformed both gilts and cash in real terms, by more than 3% and more than 4% a year respectively.

Tax-efficient investing matters

If you’re going to invest for your child, it’s also important to consider the most tax-efficient way to do so, particularly over a long timeframe.

A Junior ISA (JISA) is an excellent option, ensuring that the investment will grow free of income or capital gains tax, particularly helpful with the UK’s tax burden at record levels.

Once it has been set up by a parent or guardian, anyone – grandparents, godparents or generous uncles and aunts, for instance – can pay into it, up to a total of £9,000 each year. Making regular contributions from your earned income is painless and a great savings discipline, but you can also make ad hoc payments.

Either way, the account cannot be accessed by anyone until the child reaches 18, when it automatically transfers into their name.

That’s likely to be fine if your youngster is level-headed and responsible, but parents of more wayward children might prefer an alternative route, albeit taxable.

A designated account (opened in the parent’s name but with the child’s initials as an indicator) allows parents to decide when the money should be handed over. Parents need to be aware, however, that because the money effectively remains in their name, any income or gains generated will be taxed as theirs.

Investment JISAs and designated accounts are widely available and easily opened through online platforms such as AJ Bell.

Once you’ve set up your child’s account, you’ll need to choose a fund or investment trust for the money coming into it. To keep things simple, it makes sense to select one or two ‘core’ broad-based equity investments covering a range of different markets.

Investing for children with Aberdeen

Aberdeen’s range of investment trusts is a good hunting ground. A strong core contender would be Murray International Trust, a highly regarded global trust investing across multiple markets.

UK choices include Dunedin Income Growth Investment Trust and Aberdeen Equity Income Trust; or if you’re comfortable with a little more risk in return for potentially higher growth over the long term, you could tap into Aberdeen’s longstanding Asian expertise, for example through Aberdeen Asian Income Fund.

In each case, any dividend income generated can be reinvested into additional shares, helping to boost the potential for long-term growth through the power of compounding.

A gift of an investment account may not seem terribly exciting but there’s arguably no better way of giving children a head start in life than by investing on their behalf. Treat it right and it could produce a nest egg to take your child’s breath away in years to come, as they set their sights on university life.

Find out more at aberdeeninvestments.com/trusts/invest-for-children

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