Saving for university: building a fund for your child

There will be nerves in many a household this week as students - and their parents - await exam results.

Those studying for A-Levels, T Levels and Vocational Technical Qualifications all learn their results on Thursday morning, with minds no doubt wondering what come’s next.

If it’s further study at university then there will immediately be a long list of things that need to be arranged, not least of which is how it’s all going to be paid for.

Many parents will want to do what they can to help their child financially. Average student living costs have reached £1,078 a month, according to student advice site Savethestudent.org, and that’s excluding the £9,250 per year cost of tuition.¹

Meeting those bills takes some serious planning for both students and parents. For those leaving for university in just a few weeks there’s little time to make any real difference by saving in advance. But for those with longer to plan it’s possible to give your child a substantial leg-up as they enter higher education, leave home and enter adult life.

We recently ran some numbers to show how parents can give their child’s finances a head-start by the time they reach 18 years of age.

Our calculations revealed that investing just £25 a month - the minimum required from most investment regular savings plans - from the moment they are born could generate a pot worth £8,119 by the time they turn 18.²

That’s enough to cover 18 months of rent, based on the current average monthly rent of £439. Or enough to cover groceries, utility bills and a mobile for two years and 10 months - practically the entire duration of a typical university course in England.³

Below is a table showing the sums it may be possible to build after 18 years by investing even more each month. The numbers are based on a 5% return after annual investment costs of 0.75% have been applied. Please note these figures are for illustration purposes and are not guaranteed.

^{Source: Fidelity International, August 2024.}

Those able to contribute larger sums could help to provide further support towards savings goals and financial milestones. For example, recent figures indicate the average loan balance for a higher education borrower starting to make repayments has increased to £48,470.⁴ A monthly contribution of £150 over an 18-year period could amount to a similar sum (£48,712).

One important note here - the decision to use savings to avoid student loan borrowing, or to pay it off early, is not straightforward. Student loans are not like other forms of debt because repayments are capped based on earnings, the debt is term-limited and you can’t decide to reborrow money if you decide to repay early. The ever-thorough MoneySavingExpert site has covered the considerations here.

How and where to save for a child

It is important to invest as tax-efficiently as possible. Junior ISAs allow you to save with no income tax or capital gains tax on your investment returns and withdrawals. The Junior ISA allowance for the 2024/2025 tax year is £9,000.

In choosing an investment for a Junior ISA, consider the length of time the money is likely to be able to build for before it will be accessed and the level of monitoring and engagement you’ll want to provide along the way.

Investing from the birth of a child until their 18th birthday provides a very long timeline and lots of opportunities for losses to be made up for in the future. For that reason, it makes sense to invest in the early years in shares where the potential for growth is highest, rather than in slower and steadier assets like bonds or cash.

Using a low-cost passive fund which tracks the market means you can leave investments unattended for a long period without having to worry that they will underperform. The Legal & General Global Equity Index Fund does the job and features on our Select 50 list of favourite funds.

Source:

¹ Savethestudent.org, 27 July 2024
² Calculations based upon investing into a Junior ISA for 18 years (216 months) with a 5% growth per annum, minus a 0.75% annual management charge (net 4.25%). Fidelity Personal Investing does not charge a service fee on Junior products, including JISAs or JSIPPs (Junior SIPPs).
³ Based on average monthly costs from savethestudent.org
⁴ The Student Loans Company Statistics Publication, June 2024

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Please be aware that past performance is not a reliable guide indicator of future returns. Eligibility to invest in a Junior ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a Junior ISA will not be possible until the child reaches age 18. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.