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Can't make a student without a nest egg

Parents have to dig deep these days to send their children to university. David Budge reports on investments that may reduce the pain. The Scots deeply resent being typecast as misers, but even they like to poke fun at the legendary meanness of Aberdonians who were at one time reputed to evacuate their main shopping street when charity collectors began rattling their tins.

Perhaps it was no coincidence, therefore, that it was an Aberdeen court that last year had to order a father to pay his student daughter Pounds 65 a week to support her during her studies. But it isn't only in Scotland that the cost of higher education is creating family tensions.

The fact that 28 per cent of school-leavers are now going on to university is one of the Government's real achievements. It is parents, however, who are having to pay a large part of the cost of this success because maintenance grants are being slashed by 10 per cent a year in an attempt to keep HE spending in check. A recent survey for the National Union of Students revealed that 38 per cent of students now receive top-up contributions from their parents while 48 per cent rely on parental loans.

In 1994-95 the maximum grant available to students outside London is Pounds 2,040 (it will drop to Pounds 1,885 next year). But only the sons and daughters of families with an annual income of under Pounds 15,500 qualify for the full grant and 30 per cent of students do not qualify for even a reduced grant because their parents' income exceeds Pounds 32,412.

This means that a third of students face a potential annual shortfall of about Pounds 3,700 - Pounds 70 a week. And though more cash is being made available through the Student Loans Company the maximum annual loan permissible is currently only Pounds 1,385 - Pounds 38 a week. High-street banks provide loans too, of course, and allow students to run up considerable overdrafts but this too is a dubious privilege that ultimately has to be paid for.

So what can parents of school-age children do to reduce the future financial burden on both themselves and their offspring in view of the alarming prediction from the London School of Economics that by the end of the decade most students will leave college or university owing as much as Pounds 10,000?

They can hope that their child gets a company sponsorship - bursaries averaged Pounds 1,100 last year and sponsored students also earned Pounds 173 a week for vacation work (which has been in short supply in recent years). Army officer cadets did even better, some earning Pounds 10,000 in their last year.

But if your child doesn't want a career with the Forces it is better to begin squirrelling cash away as soon as you can, particularly if two or more children in the family are likely to be in higher education at the same time.

Some people opt for personal pension plans because they can provide tax-free cash as early as age 50. Others remortgage to provide loans secured on the equity in their homes. But most insurance and investment companies that offer higher education savings schemes recommend at least a 10-year plan that involves taking out three endowment policies which mature in each of the years a son or daughter is at university. These can prove to be very beneficial if a parent dies before the child reaches university but, according to Andrew Warwick-Thompson, our financial columnist, they are usually best avoided.

"I don't think they are good investments," he said. "Insurance products that involve regular savings have high commissions and correspondingly high charges. Furthermore, the insurance company pays tax on its investment fund and this inevitably has an impact on the investment return to you. Another consideration is that if a policy-holder wants to stop paying premiums or surrender the policy before the contractual maturity date the "paid-up" policy value or the surrender value will often be less than the premiums paid, particularly in the early years."

PEPs (personal equity plans) offered by companies such as Perpetual and Morgan Grenfell have historically been the best performers over 10 years although they are a relatively high-risk investment due to the volatility of the stock market. Parents who want more security might consider TESSAs (Tax Exempt Special Savings Accounts), which are available through banks and building societies. But Andrew Warwick-Thompson cautions that there may be penalties if you want access to your capital within the five years.

More secure still are National Savings Certificates. They offer a guaranteed, tax-free rate of interest over five years but again there is loss of interest if you cash in the certificates early. Also, in the longer term, such investments are likely to underperform the stock market.

This advice assumes, of course, that your child will not go up to university for at least another five years. If, in fact, the timescale is much tighter and you have only just begun to think about higher education costs because of the onset of the GCSE season the best advice may be to minimise your risk and start putting money into a building society savings account that offers a rate of perhaps 5 or 6 per cent.

But again it may pay to do some homework before handing over any money. Although the Chancellor of the Exchequer is trying to play down speculation about an imminent jump in interest rates, world-wide economic pressures suggest that they will indeed rise. This means that it would probably be sensible to avoid any account offering fixed interest on your savings.

Next week: how student teachers cope

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