How to fund your child's university education

Find out what you can do to prepare for the financial impact of your child going through university
fund children at university
As the cost of a university education and tuition fees look set to rise, the need for parents to carefully plan ahead is even more important. Photograph: Christopher Furlong/Getty Images

How much will it cost to send my child to university?

The average student starting university this year could expect to graduate with around £24,000 of debt. If the coalition government adopts Lord Browne's report recommending the removal of the current cap on tuition fees of £3,290 a year, the figure could soar higher still – up to £10,000 a year for the most in-demand colleges. If you have more than one child to fund through university, the figures will be even more startling.

If I have just had a child, how much should I begin putting away?

The good news is that you have up to 18 years during which to save a university nest egg. The bad news is that some experts claim that nothing less than a pot of £60,000 will be enough to see a child through higher education.

The better the interest rate or return you earn, the less you will need to put away per month. If you saved £170 per month over 18 years with an annual return of 5% on your savings, you would generate a pot of around £60,000 (before any costs or tax). The same monthly investment at an annual rate of return of 6% would result in a pot of £66,000 after 18 years.

But £170 per month is an unrealistic sum for many families. Monthly savings of £25 at an annual rate of return of 5% would generate around £8,700 after 18 years.

But I haven't got the money ...

Anyone still eligible for child benefit after the coalition's cutbacks could invest this money into a savings account, or a proportion of it. If you saved half of the £20.30 weekly child benefit payment, you would be able to invest around £40 per month – at 5% per annum this would generate a pot of around £14,000 after 18 years.

You could also encourage grandparents, godparents or close friends to help contribute to the savings pot, especially while the child is very small and unaware of what birthday and Christmas presents he or she is getting.

Where should I put my money?

Investment experts claim that if anyone is looking to save for 10 years or more, they should consider a stock market-based investment of some sort. These have historically produced better returns over longer periods than high-street bank or building society savings accounts.

Many fund management companies offer products for children, such F&C's Children's Investment Plan, which enables people to choose from a dozen F&C-managed investment trusts (with a minimum monthly investment of £25 per trust, while the minimum lump sum is £250, and you can stop, start or change your payments at any time). Others include Invesco Perpetual's Children's Fund, the Jump savings plan from Witan Investment Trust and Scottish Investment Trust's Stockplan: A Flying Start.

According to, the best-paying children's savings accounts are offered by the Halifax (Children's Regular Saver account, paying 6%) and Bath building society (Future Builder account, paying 5%). Keep an eye on the rate you are earning though and be prepared to switch if better ones are offered.

Will I have to pay tax on money I invest on behalf of my child?

Children are subject to tax just like adults, but few of them earn enough to need to pay it. Children, like adults, have a personal tax allowance of £6,475 for the tax year 2010-11.

As long as their annual income (including interest) is below this amount, they'll be able to receive interest on savings without having the 20% savings tax deducted (though parents or guardians must fill in tax office Form R85 for each account). Similarly, if you are making disposals with a share plan on behalf of your child, as long as the child's chargeable capital gains do not exceed their capital gains tax allowance (£10,100 in 2010-11), there will be no CGT to pay.

While you can invest as much as you like on behalf of your child, if the money you give your child earns more than £100 in interest a year, the interest will be taxed as if it were your own.

The £100 limit only applies to parents and step-parents. Grandparents and other adults who give money to children are not liable to pay the tax if the interest exceeds £100 a year.

However, there are a number of completely tax-free savings products available only for children. More information can be found at HM Customs and Excise website.

What are these tax-free products?

They include: Child Trust Funds (for those with existing CTFs and those born before 31 December this year, Children's Bonus Bonds from National Savings & Investments , index-linked certificates from NS&I, Premium Bonds and Isas (which can be opened once your child reaches 16).

What happens when my child turns 16?

They will be responsible for the tax on their interest payments, so they'll need to fill in their own Form R85 (provided their income stays below the personal allowance). Accounts held in someone else's name should be transferred to them, otherwise the bank or building society will immediately have to deduct tax from the interest (though it may be possible to reclaim this tax).

What should my child do if they have just started university?

Help is available for students in university or higher education, including student loans, grants and bursaries. Additional sources of help are available for: disabled students; parents if there's an adult who depends on you financially; students with children; and specific help for those on certain courses such as medicine, social work and certain healthcare courses.

The government's Directgov website has further details.