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What's a better way to help my grandchildren through university?
As autumn approaches many students are preparing to start university for the first time. For most, this will mean leaving the place they grew up in behind as they embark on a life far from their home comforts. This will bring with it plenty of new academic opportunities, and likely many late night takeaways too.
University is more expensive than ever. Nowadays, most universities charge the maximum £9,250 and, depending on parents’ income, they can borrow up to £11,002 to cover living expenditure if they live in London, or £8,450 outside of the capital.
However, this maintenance loan, as it’s known, falls massively if parents are medium or high earners. For instance, if a student’s parents earn £70,000 between them, they will be able to borrow just £4,054 to live off for a whole year outside of London. 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
If we use parents who earn £70,000 as an example, assuming the student’s university charge full fees, over the course of a 3 year course, this amounts to £40,000 of eventual debt.
This debt could prove a burden in later life. Having debt is likely to make it much harder to get a mortgage – new mortgage rules mean that the repayment of student loans will be factored into mortgage lenders’ ‘affordability tests’.
Interests rates could rise substantially, meaning the repayments on the debt would rise to ever higher levels. What’s more, the government are liable to introduce retrospective changes that raise the cost of the loan in other ways.
In fact, they’ve already done this. Originally, the income threshold above which former students begin repayments on their loans was supposed to rise in line with inflation. However, in November 2015, the Government announced that the threshold would remain fixed until 2021, meaning graduates repay more.
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 grandparent in this situation can afford to cover it, providing this level of financial support is possible, this is a great help to a student. This amounts to nearly a year of rental payments, based on rent costs in a Northern university city like Liverpool, Manchester or Leeds.
Having rent covered can often be a great way of ensuring that a grandchild can really get the most out of their time at university. It can be the difference between a life on the breadline and a life with a balance between leisure and budgeting.
For those of you with larger savings or assets, covering the entire cost of a grandchild’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.
However, having a grandchild graduate without any university debt would set them up well for their future. They will be able to graduate and not have their university debt resting on their shoulders at the start of their working life.
Option 2: Investing in a BTL property on their behalf
Quite rightly, many grandparents are worried their grandchildren will never own a home. Young people have it tough; they face high house prices and graduate job wages are lower in comparison to what they once were.
If your grandchild is going to attend university in London, house prices are incredibly high as they are and currently on a downward slope, so buying here may not be the wisest decision.
However, if they are going to a university outside the capital – excluding pricey Brighton, Bristol, Edinburgh, Cambridge and Oxford – 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 grandchild and fellow tenants could pay enough rent to cover the mortgage costs.
In a central student area of Manchester, you can find a good quality, three bedroom house for £160,000. Say you have three tenants in this property, including your grandchild, each paying £60 per week. From this, your monthly rental income would be £780.
With a £60,000 deposit, the mortgage would be £100,000 at a rate of 1.7pc on a two year tracker deal. Based on this, on an interest only basis, your mortgage would cost about £140 a month. This gives you a very good margin, assuming that you have the above three tenants renting your property.
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.
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 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 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 fall in the area you’ve purchased your grandchild’s 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.
However, owning a house would give them a highly valuable asset and put them on the right course towards a successful financial future.
Ultimately, it comes down to your evaluation of your 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 grandchild’s future.
Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers LLP or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.