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Are Junior ISAs and CTFs the answer to student debt?

by Natasha Terbraak, 13 December 2010

The recent news of tuition fee hikes has caused fears that students will be put off university if they or their parents can't afford to support them. But in the United States, where higher education can cost up to $75,000 a year, parents start saving as early as possible, aiming to pay at least half of the expenses. Can Junior ISAs and CTFs help you do the same?

Most would agree that post-election 2010 has been characterised by grievous budget cuts, and the app

ropriate backlash from a range of groups. The announcement that Child Trust Funds would be scrapped was made within two weeks of the change in government, and the June budget saw £11bn a year cut from benefit and welfare payments. New debates and decisions continued to the very end of the year, with the controversial plan to restrict eligibility for child benefit, and - as recent as last week - the finalisation of a near tripling of university fees.

The waves of protests have dominated news headlines, with students outraged by the prospect of perpetual graduate debt. Fees are to rise from £3,290 to as much as £9,000 for some institutions, meaning students will find themselves leaving university saddled with - at the very least - £30,000 of debt, to be paid back as 9% of eventual income.

While the focus has been on the outrage expressed by tens of thousands of students of all ages, many parents have also voiced concerns about the financial burden of supporting their children during their studies and after graduation.

Though the threshold for repayment will be raised from its current salary level of £15,000 to £21,000, there are arguments that £21,000 is still well below an income to comfortably afford what some are calling a 9% graduate tax. The protests centre around fears that students will be put off going to university if their parents are unable to alleviate the financial burden.

Still, while the hike appears harsh (considering fees hovered around £1,000 just one decade ago), attending higher education in the United States has always been so costly as to be an absolute privilege to most students. There, the 2009 cost for undergraduate tuition and board was more than $30,000 (more than £19,000) for private institutions per year - with some of the most expensive charging up to $75,000.

So how do American parents even begin to fund their child's degree? The answer, which may soon have to become the norm here in the UK, seems to be: start as early as possible.

A recent poll found that on average, American parents start saving for college when their child is just 3 years old, amassing $48,367 (approximately £30,762) by the time they turn 18. A whopping 72 per cent of parents say they intend to pay at least half of their child's college costs, with 27 per cent aiming to cover "most" of the expenses.

Though this may seem little consolation for those just about to enter higher education here in UK, (who, born in the early nineties, are not yet of the Child Trust Fund generation), parents with young children do now have the opportunity to alleviate their child's student debt.

Children born after September 2002 will have had a Child Trust Fund account set up at birth, which is an invaluable asset for long-term, tax-free savings. Though the Child Trust Fund will be scrapped from next year, existing ones will continue to accept top-ups from family and friends up to the £1,200 limit each year. The full amount invested at a seven per cent growth rate could amount to as much as £45,000.

For children born before September 2002, or after January 2011 (the official end of the scheme), the Junior ISA could be the answer to funding your child's university education. Intended to replace the Child Trust Fund, it is set for launch in autumn 2011 and will provide the same tax-free savings, only without the £250 vouchers each newborn used to receive. Eligibility will be backdated to ensure that any child who missed out on the Child Trust Fund can instead invest in the new savings plan.

With money invested for long enough with such tax-free schemes, parents could find themselves with a lump sum that will cover at least most of their child's student debt.

To find out more about Junior ISAs, click here.

To find out more about Child Trust Funds, click here.

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