losing my mind - saving for uni

[befuddled321]

Please help! I've spent hours on moneysavingexpert today and I still don't know what to do...

Had an unexpected windfall recently and think it would be clever to put a little bit of it aside for 16 year old DS to have at uni. He is 17 in August, so will be starting university autumn 2025.

Our initial plan was to help with living costs out of our own income but realising this is a bit dim because we have the opportunity to save a bit before then, plus our income is taxed (I am basic rate, DH is higher).

So - presumably it makes sense for us to set him up with either an ISA (and he can have the adult one as he's 16) OR a savings account with a good rate of interest - but I cannot decide WHICH is the better option...and I also don't know how much we should put aside for him, if that makes sense.

He will get a loan for tuition fees but living costs will be at least 30k over the three years I imagine. We COULD, if it were the best idea, set him up with a junior ISA of 9k now, and an adult ISA of 20k. But that is a bit of a stretch for us, and he will need to start using that money from the time he starts Uni - so I don't know what is the most sensible option...can anyone advise? !

We have saved for our 2 going to uni but blimey there is no way either of them will be getting it in their names!

I think the prospect of being taxed a modest amount (how much tax are we even talking here? Interest rates aren't exactly sky high and it's relatively short term) is infinitely preferable to the possibility, however remote, of seeing the whole lot pissed up the wall in his first term.

We are saving a considerable amount for our DC for both uni and subsequent deposits, and I wouldn't even consider placing it in their names for the sake of a small tax advantage.

Keep it in your name, not his.

Use your ISA allowances for either this soon to end tax year (if not yet used) or wait until April when it resets.

You can then put £20k x 2 into cash ISAs in your names so £40k.

Put the rest in premium bonds for a year.

When the next tax year comes around, take it out of premium bonds and put up to £40k away again, into your ISAs.

By staggering the moves into your own ISA accounts, while using Premium Bonds (also tax free) as a holding space while you wait between instalments/tax years, you won't end up paying tax on your savings.

We are almost at the start of a new tax year, so within a max of 15 months, you will be able to put up to £80k into ISAs in your own names, not his. Sorted!

I would highly recommend not telling him about these lump sums and then, when he is planning university, you can calculate what income you can give him and pay it monthly, like a salary. This is what my family did - I had my rent paid, plus an income of £600/month - and it was absolutely amazing. In the first instance, because I was extremely fortunate, but secondly, because it really helped me to learn to budget on a monthly salary - which has served me well for life.

Also, why impose a loan on him? He may not need to take out a maintenance plan if you can support him, so I wouldn't do that just because it's available. Paying back student loans can become a huge burden on people and make things like affording rent or a mortgage much harder.

There is no point in him not getting the maintenance loan if he is getting the fee loan. His repayments will be the same either way so if you try to fund his living costs without him using the loan you are just voluntarily giving extra money to the government.

He will get the minimum maintenance loan anyway. That won't be enough to live on but you can supplement it. I would suggest about £1,500 per term is sufficient on top of maintenance loan for a basic functional student lifestyle. If you want him to live in luxury and have way more disposable cash than his peers you could go up to £2000 per term but I think it's good for them to need to live on a shoestring.

I wouldn't put the money in his name now. 18-21year olds aren't yet fully mature and do make foolish financial mistakes. I used to work in a role assessing student hardship grant applications and a shocking number of them boiled down to "My parents/grandparents gave me 3 years worth of living cost money when I went to uni but I spent it all in 2 years so now I have run out and can't afford to eat". Those applications got rejected.

Better to keep the money in your name and give it to him term by term. The only advantage to putting it in his name is a couple of years worth of tax on savings interest which whilst it could come to a few hundred pounds is not enough of an incentive to risk it.

You are correct in that your DS will pay less tax on interest if the money is in his name instead of yours (unless it’s in an ISA or premium bonds as those are tax free)

So you have to weigh up the options of your DS having access to the money v the tax savings.

Personally, I agree with most of above, I’d take the (probably small) tax hit, as there’s a lot you can do to reduce it, but ultimately keep the majority of the money in my control. I’ve also heard far too many horror stories about students spending all their money on crap and then having to come begging for more cash.

If your DS is sensible then I’d give him the 4k per year to start a LISA, but I’d make sure it was in something he couldn’t actually access easily.

The maintenance loan will pay for all or most of his accommodation depending on where he goes. Most students work too.
My dc got full loan and I couldn’t top up. Budgeted well and left with some money.

I think Id keep the money in your name and take the tax hit. Rather than risk it being blown.

I think it's quite sad we can't trust our young people with money. After all, if they went straight to work, that would be their money to do with ad they pleased.

Both my DD's had a good chunk of cash at 18. They both bought cars, went to uni, and still have the majority of those cash savings left. In fact they hate spending their savings, and we had to top them up for various expenses. So somehow, we ended paying anyway!!

I think you can't open a Junior Isa (9k) if you have a Child Trust Fund?

I think it's quite sad we can't trust our young people with money. After all, if they went straight to work, that would be their money to do with ad they pleased.

I was brilliant with money at that age, my DB and one of my DC were absolutely terrible.

Stick it all in ISAs. The leading rate for a 2yr fix is 4.75%.

Bonds are taxed, I really don't understand why people advocate bonds

premium bonds are even worse, no guarantee of a return.

Grab a decent 2yr fix ISA before rates fall later this year. Put the rest in a junior isa for the kid.

Market leading rates here:

www.thesavings.guru/isas/2-year-fixed

You're welcome.

Some really great advice on here, thank you so much.

@laclochette - I'm really confused re premium bonds. DH is a higher rate tax payer and I am basic rate - but I am finding it difficult to understand the best thing to do in order to maximise interest and savings - particularly as we may need to draw out at certain points in the future.

@YireosDodeAver - again, confused! Sorry if I am being really dim, but I'm unclear on your calculations here. The maintenance loan we will get will be about 4k per year. If I supplement by 1.5K a term that's 8.5 a year. He's not intending to go to Uni in London but even then, that seems really low - I thought the average was about 10-12k a year?

Also, how will the repayments be the same if he takes the maintenance loan?!
He'll already have to pay 9,250 x 3 = 27,750 in total which he'll have to pay back. Our household income is more than 65k per year, so he'd only be entitled to the minimum £4,651 per year. If he takes that (x3 = 13,953) , his debt becomes - £41,703.

My understanding is the interest starts going up as soon as the loan is taken, so surely it's best to avoid that if possible?

The trouble with a LISA is that if you withdraw money for anything other than a house deposit (for a house <450k) or retirement you pay a 25% penalty which means that you actually lose more than the government bonus.

@Rummikub - re working - no guarantees WHATSOEVER he'll get in - I know it's ridiculously competitive, but DS is going to try for Cambridge. My understanding is that he wouldn't be able to work at the same time with the demands of the course. He would work in the long holidays though!

Ok that’s true. And think accommodation is more.
if he’s good / sensible with money then put in his isa.

5thCommandment - thanks. I want to avoid stocks and shares ISAs as they performed quite badly for us historically and I don't want to risk this money, but cash ISAS are an option. One thing I don't really understand is when cash ISAs permit withdrawals, but the interest is paid annually.

Say you have an ISA of 40K which pays 4 percent annually - so within a year you make 1,600 in interest. What happens to the interest if you draw it out before?

take out the loan anyway. Then if your circumstances are good you can opt to pay off a chunk.

imo though the extra money is useful after graduation. As my dc is finding some you could keep it for then.

Hi, if you withdraw before the term ends you lose interest on the amount withdrawn - the ISAs usually allow 10% withdrawals three times. Typically you should try and not withdraw to maximise your returns, though.

Annual interest is also usually better than interest paid monthly but it's marginal, I wouldn't lose sleep over that.

@befuddled321Also, how will the repayments be the same if he takes the maintenance loan?!
He'll already have to pay 9,250 x 3 = 27,750 in total which he'll have to pay back. Our household income is more than 65k per year, so he'd only be entitled to the minimum £4,651 per year. If he takes that (x3 = 13,953) , his debt becomes - £41,703.

Repayments are made based on the graduate's income once they are working. NOT based on the amount borrowed.
Unless your DS becomes super-wealthy with a 6 figure income (in which case the difference will be pocket-change) the likelihood is that he will make repayments throughout the 40 year repayment period.

If he is earning £45,000pa and owes £27,750 he will pay 9% of earnings over £25k = £150 per month

If he is earning £45,000pa and owes £41,703 he will pay 9% of earnings over £25k = £150 per month

There is no increase in anyone's wealth apart from HM Govt if you choose option 1.

Apologies I got the maths wrong on the £1,500 per term suggestion. Making up the difference between minimum and maximum student loan would be £1,793 per term - that would put him on the same income as peers getting the maximum loan who can expect no help from parents. I wouldn't go above this by much.

5thCommandment - thank you, that makes sense.

@YireosDodeAver - ok on topping up the loan per term. But re the loan, I understand that payments are made based on graduate income...however, doesn't the amount of debt increase over time with interest?

So whether you owe 28k or 42k, that amount doesn't stay fixed, so even if the monthly repayments look the same on your earnings, the amount of debt is growing?!

@befuddled321
Yes interest will be added.
Seriously watch the Martin Lewis video for a great explanation.
You pay back a percentage of your income not your loan, and only once you are earning above a certain amount.
Some people will never pay back the full amount e.g. classroom teachers.
Some will e.g. head teachers.
You need to see it as a graduate tax rather than a loan. The more you earn, the more you pay back.
If your son is wealthy in the future they could overpay and clear the debt quickly if they wanted to (e.g. big city bonuses).
In the medium term they are better off with a bigger deposit for a house.

There are other videos from him about overpaying once working.

@befuddled321 With a flexible cash ISA, you can withdraw money within the year, often eg 3 times. You don't pay tax on any interest you earn on the money. It doesn't matter if you withdraw money from the account. At the end of the year when you get your statement of total interest earned over the tax year from the account, none of it goes to the tax man. You don't "withdraw interest" from it. You can just withdraw money from it, whatever the balance is, some of which will comprise your initial capital and some your accruing interest.

Ultimately flexible ISAs will often have worse interest rates than simple flexible cash savers so you'll need to do some sums to work out whether it's worth taking the lower interest rate and avoiding tax, or just looking for a regular savings account with a higher interest rate and paying some tax on that.

For example if you put £60,000 into the Goldman Sachs Marcus account - an instant access cash savings account - at their current rate of 4.79%, you'd earn £2937 of interest over a year. A higher rate tax payer gets £500 interest tax free. So they'd be taxed 40% on the rest, leaving them with a total of £1962 interest earned in a year. The taxman takes about a grand of interest.

You'd need to find a flexible cash ISA with an interest rate of over 3.2% to make it worth more, in interest payments, than the taxed account with the higher rate.

If you and your husband each put £30k into different Marcus accounts in your own names, you'd pay even less tax on that interest, because you'd each be using your individual tax-free interest allowances - £1000 for you as a lower rate taxpayer and £500 for him at the higher rate.

For the vast majority of graduates who earn "normal" salaries this doesn't matter. Obviously it will be different for very high flyers who do actually manage to pay off their loan but for a typical average graduate career trajectory the end of the 40 years will still see some debt owed, and that amount is wiped off. It doesn't really matter whether the amount wiped off is £500, £5,000 or (if their earnings stayed below £25k) £50,000.

It's better to keep the money in a high-earning interest account until your DS is at least 5 years into his post-uni career. If at that point he looks like he's on a trajectory to be earning £200kpa+ in a few years then there's a bit of interest to be saved if the debt gets paid off sooner (but if he's on that trajectory perhaps doing so is up to him not you) but if he's on £32kpa and unlikely to top over £50kpa any time soon you'd be wasting your money if you reduce the debt, you'll just be reducing the amount that's eventually written off but not benefitting your DS at all.