Why parents and grandparents are absorbing the cost of a degree

As A-level results day approaches on 13 August, families are increasingly confronting not just the grades needed for a university place but the financial burden that follows. Around 1.5 million students take out a loan each year, with the average 2023 graduate owing £47,900 by the time repayments kick in. That debt sits with graduates for up to 40 years before any remainder is written off – a timeline that has pushed parents to intervene earlier and more heavily.

Wealth manager Rathbones reports that seven in ten parents now expect to cover at least half of all university costs, while 15 per cent plan to fund almost everything. For courses starting in 2026-27, tuition fees in England are capped at £9,790 a year, rising with inflation after a long freeze ended in November 2024. More than a quarter of worried parents anticipate handing over £50,000 per child to meet tuition, accommodation and living expenses, Rathbones’ research shows.

The living-cost squeeze is equally pressing. Save the Student’s 2025 data puts typical monthly spending at £1,142 – roughly £10,200 for a nine-month academic year – while King’s College London suggests undergraduates in the capital will need nearly £15,930 during term time. Maintenance loans do little to bridge the gap: students from households earning above £62,410 receive just £5,048 if they study away from home outside London. That often fails to cover rent alone, making parental support for day-to-day living “a must”, says Rathbones financial planner Alex Race.

Inheritance tax reform is adding urgency. From April 2027, pensions will be drawn into the IHT net, pushing more families to gift cash during their lifetime. RBC Brewin Dolphin research found that 12 per cent of those who make gifts do so specifically for education costs, and advisers note a clear shift toward using surplus income to pay fees upfront while simultaneously reducing a future tax bill.

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The investing and gifting vehicles families are using to pay for university

The Junior Isa trade‑off

A Junior Isa allows parents to invest £9,000 per child per year with tax‑free growth. At 18 the money belongs to the child outright, with no requirement to spend it on education. That flexibility can be a drawback for parents who want the funds ring‑fenced for university – the same pot could just as easily pay for a gap year or a house deposit. Because of that, some families stop contributions well before the 18th birthday so the child doesn’t receive a larger‑than‑intended lump sum at once.

Using surplus income to cut IHT

Grandparents, who often have lower outgoings, a mortgage‑free home and pension income, are increasingly turning to the surplus‑income exemption. Regular gifts made from income are immediately free of inheritance tax, provided they don’t reduce the donor’s standard of living and a consistent pattern can be demonstrated. Two‑thirds of grandparents now contribute to education costs either regularly or occasionally, Rathbones data shows. The key condition is meticulous record‑keeping: HMRC will want evidence that the payments are normal expenditure out of income.

Bare trusts vs discretionary trusts

A bare trust simply holds assets for a beneficiary who takes control at 18 – the simplest structure but again no parental lock on the end use. A discretionary trust, by contrast, lets trustees decide which beneficiaries receive money and when, suiting families who want to retain control while paying university bills over several years. Although trusts have picked up a reputation for complexity, Michelle Holgate of RBC Brewin Dolphin says they are “being looked at more by families” as a way to pass money down generations while the donors can still see it used. Trusts also typically fall outside an estate after seven years, though many parents still prefer the straightforward approach of paying fees annually and forgoing the trust structure altogether.

Three concrete steps for households starting to plan now

  • Start a Junior Isa early, but brace for the 18th‑birthday handover. The annual £9,000 allowance and tax‑free growth are attractive, yet the child gains full control at adulthood. If the aim is strictly university funding, estimate the likely cost and stop contributions once the pot reaches that figure, avoiding a surprise bonanza that might be spent elsewhere.
  • Grandparents with surplus income should document a pattern now. Regular gifts that come from income – pension payments, say – can leave the estate immediately for IHT purposes. Keep a written record of dates, amounts and proof that the transfers didn’t cut into the donor’s own standard of living; this is the evidence HMRC will ask for.
  • Prioritise maintenance support over the loan ceiling. The maintenance loan for a student from a family earning more than £62,410 is £5,048 – typically less than half of annual living costs outside London. Topping up the child’s rent and food budget reduces the need for part‑time work and keeps the focus on studying, and it may prove more immediately valuable than front‑loading tuition fees.