How to save up for your child's college days

Abigail Montrose looks at how you could ease your child's future student loans burden

If your children are doing well at school, the recent debate on the funding of higher education may have set alarm bells ringing. Students entering higher education from next year will receive no grants, only loans. They will not only have to pay their living expenses, but, if you earn over pounds 16,000 a year, they'll have to contribute something towards their tuition fees - this will average around pounds 1,000 a year, depending on your income. All in all, a degree course could cost around pounds 20,000 - maybe more.

The Government's loans system should cover all of this, and the student does not have to pay back the loans until they have started earning above a certain level, but many parents may wish to plan ahead so that they can contribute towards the costs. There are a number of ways you can save. How you do it will depend both on the time available and your personal circumstances.

Parents with children starting secondary school have seven years to save towards education costs, while those with children about to start their GCSE courses typically have only four years to go.

For those who do not want to take any risk, deposit accounts are the answer. Currently, the best deposit accounts are paying around 6 or 7 per cent gross. At 6 per cent, a basic-rate tax payer would need to save pounds 169 a month for four years in order to build up a pot of pounds 9,000, according to Towry Law, a firm of financial advisers.

But if your child is just entering secondary school, or is about to go into year eight, you have seven years in which to save for higher education. Over this period, investing in stocks and shares makes a lot of sense.

For most people the easiest, safest way to invest in shares is through a unit trust or investment trust. However, as the Association of Unit Trusts and Investment Funds points out, it is impossible to say how much any fund will grow in the future.

Over the last seven years the average unit trust has risen by 10.3 per cent a year. But a closer look reveals huge disparities. For example, from June 1990 to June 1991, the average UK growth unit trust fell 9.2 per cent, in 1994 to 1995 it grew by 3.5 per cent and it grew again, the year after, by 15.9 per cent.

The other popular form of fund is an investment trust. Some look promising, but there are more than a few "duds" around, so unless you are a knowledgeable investor, prepared to put time and effort into building a portfolio, you should take advice.

Whether you decide to invest in a unit trust or investment trust, the most tax-efficient way to do this is via a PEP, which will shelter all the earnings free of tax. Up to pounds 6,000 a year can be invested in a general PEP, and all the earnings are tax free.

But, and it is a big but, the value after a year or two will be totally dependent on stock market performance. There's no guarantee what it will be worth in five, six or seven years from now.

Another possibility, which also offers a tax break, is to open an offshore roll-up fund in your child's name, which can be cashed in when they reach 18. Although this sounds exotic, it is simple in practice. Regular savings or a lump sum are invested and the income is "rolled up" in the fund. Since no income is drawn, and the fund is based offshore, there is no liability for income tax.

Remember that although you are making the payments, the fund is in your child's name. So when the time comes, say August 2004, they, rather than you, collect the cash. And since they are students, not liable for income tax, the money will be tax-free.

With-profits endowment policies offered by insurance companies can also reduce the risks of stockmarket investment. Your money is invested in shares and each year the profits are set aside and cannot be lost. The new range of endowments being offered by companies such as Standard Life, General Accident, Scottish Widows and Commercial Union do not charge all their fees up front, so that if you have to stop paying before the end of the term your child will not lose outn