Though buried in the busiest holiday month of the year, mid-August is nonetheless a significant period for hundreds of thousands of adults.
On 16th August, the UK’s Consumer Price Index (CPI) figure for the 12 months to July 2023 of 6.8% was released. The measure gives us the latest inflation figure which last month stood at 7.9%, down from 8.7% the month before and more than a quarter lower than last October’s 11.1%.
The key, consumer price index (CPI) measure of inflation fell to 6.8% in this year to July, down from a rate of 7.9% in June, Office of National Statistics (ONS) data showed.
The day after, 17th August, is A-level results day, a nerve-racking time for around half of 18-year-old school leavers.
Many readers will recall the tormenting wait for their A-level results. Together with half a dozen schoolmates wallowing in extreme results-limbo, your correspondent couldn’t wait: we got slightly merry the night before our results were due. The following morning, my Mum knocked lightly on the door of the bedroom I shared with my brother, peered inside and entered holding a small envelope addressed to me.
Mum sat on the edge of the bed and handed me the envelope; as instant hangover cures go, this simple action has yet to be surpassed. I took a deep breath. Not a word was spoken. I opened the envelope and read the small slip of paper inside which summarised the previous two years’ educational efforts in a series of letters which represented grades. “Looks like I’m going to university,” I said. My Mum gasped, threw her arms around me and cried.
We Baby Boomers almost certainly didn’t realise it at the time, but the contents of those fateful letters delivered in mid-August all those years ago would have an enormous impact upon our lives.
In the late 1970s, around 10% of school-leavers went to university, most of whom enjoyed a succession of generous financial benefits. We didn’t pay tuition fees; nor were we charged for our first year’s accommodation; most of us also received a modest grant to spend on books. This meant that the overwhelming majority of Boomers graduated without being tens of thousands of pounds in debt. Instead, owing the bank a few hundred quid was an almost standard liability.
Things began to change in 1998 when tuition fees of £1,000 were introduced; they quickly rose to £3,000 before tripling to today’s £9,250 level.
Students looking forward to starting their academic life this autumn may be startled to learn that they’re likely to graduate with debts, including accommodation costs, of up to £60,000, every penny of which has to be repaid.
Until now, those who had not repaid their student loans after 30 years had the remainder written off. Under new rules, however, that time period has been extended to 40 years; the consequence is that students graduating in 2026 could still be repaying their loans well into their sixties.
Furthermore, the point at which graduates must start repaying their loans has been lowered by 8%: from the point at which they earn an annual salary of £27,295 to £25,000.
Nor do students avoid paying interest on their loans. The current rate is calculated as the Retail price index (RPI) plus 3%; fortunately, the figure is capped (for now) at 7.1%, because the most recent RPI level, for June 2023, was an eye-watering 17.4%.
While the RPI has a clear impact upon student debt, each September’s CPI figure determines the level of increase in the state pension to be paid the following April.
As this column has highlighted previously, there is a very close link between inflation and interest rates. Economists maintain that increasing interest rates is the most effective method for ultimately reducing inflation, but it is not a strategy capable of delivering instant results; the Bank of England says the tactic “takes time to work; usually, up to two years."
Yet eventually higher interest rates first squeeze and then strangle consumer spending; as overall spending falls, price rises begin to slow down. Ultimately, this state-actioned throttling of expenditure produces lower inflation.
In the meantime students, not exactly renowned for their parsimony, are in line to take a double hit: prolonged inflation over the short term and a legal commitment to repay their loans, possibly well into their 60s.
This column noted recently that “last year, the Bank of Mum and Dad helped some 170,000 first time buyers get onto the property ladder, contributing almost £9 billion to their offspring,” [even though] “…a large proportion of parents tend not to have a spare chunky sum of cash knocking around which they can dip into and give their children a much-needed leg-up.”
It follows that if parents (and grandparents) can help first time buyers onto the property ladder, they can also help students eat into potentially huge debts – or avoid them altogether.
According to Mark Gregory, Chief Executive of Equity Release Supermarket, the UK’s largest independent equity release firm, the solution could be staring homeowners in the face.
Mr Gregory says that “homeowners aged 55 and above often have the option of releasing part of the wealth built up in their home.
“Essentially, equity release enables either parents or grandparents to give their loved ones currently in higher education a helping hand as they negotiate their way through academia, relieving them of the prospect of a gargantuan tuition fee bill at the end of three years’ study.”
See how much you could release..
Most homeowners aged 55 and above may release a percentage of the wealth built up in their homes. The funds they release are tax-free. Furthermore, there are no contractual monthly repayments to make and crucially, Equity Release Council-approved ‘lifetime mortgages’, the most popular means by which funds are released, come with a no-negative-equity-guarantee which ensures homeowners’ heirs do not inherit any related debt.
Moreover, homeowners retain full ownership of their property, either until their death or admission to long term residential care, after which the property is sold to repay the lifetime mortgage.
Taking professional advice is an essential first step: releasing equity from the home could have an impact upon entitlement to means-tested state benefits and reduce an estate’s value.
The academic year begins in late September / early October, by which time inflation could have fallen, a tumble hopefully replicated by interest rates. Meanwhile, youngsters celebrating their A-level results and looking forward to an exciting new chapter in their lives may remain understandably oblivious to the worrying levels of debt they may incur over the next three years.
In the few months before the new university term gets underway, therefore, parents and grandparents have an opportunity to investigate what they consider the pros and cons of equity release with the intention of ensuring their enthusiastic 18- and 19-year-old family members preparing to embrace university life do not graduate burdened with debts of £60,000 that could follow them into retirement.
Should you wish to discuss the best way of potentially financing your children through university, please call our expert team of Equity Release advisers on Freephone - 0800 802 1051 today.