Headaches start when school's out

Parents whose children are taking A-levels in the coming weeks may find their hopes of good exam results are tempered by the knowledge that academic success means financial headaches for several years, as their offspring prepare for college life.

During the election, all the three main political parties claimed that education was a top priority for them. Labour said it would divert more funds into schools, mostly by re-allocating money previously spent elsewhere.

But David Blunkett, Labour's new Education Minister, is unlikely to find the significant new resources needed to offset the crisis facing higher education.Under Labour, as with the Tories before them, university students - and their parents - look set to become poorer.

The need for parents to salt money away to help pay for higher education is higher than ever. The first question is: how much will they need? Grants, frozen for the last 10 years, have fallen 36 per cent against inflation. In the year 1997 to 1998, they will be worth just pounds 1,710 - or pounds 2,105 in London. Students are taking up loans on preferential terms from the Glasgow- based Student Loans Company, making life slightly easier - but not much. The maximum loan of pounds 1,685 a year would give a total annual income (outside London) of just pounds 3,395.

How does that compare with outgoings? Estimates from the National Union of Students suggest a student outside London can expect the minimum bill over the year of at least pounds 4,500 - over pounds 1,100 more than their income after outgoings are taken into account.

Even if inflation stays below 6 per cent, a student living this meagre lifestyle for three years will fall short by almost pounds 4,000. Add on the loan and even cautious students will face a debt burden of pounds 9,000 when they graduate. For those not eligible for a grant the total cost will be closer to pounds 14,000.

The Committee of Vice-Chancellors and Principals, the body for university heads, is pressing for an "all-loan system" that will make students pay at least a third of tuition fees as well as living expenses. By 2005, this would increase the debt burden by pounds 2,400 a year. Add to this the projected student debt burden and the cost of a university education after 2005 comes to pounds 16,000 between parent and child. If there is no entitlement to a grant, the total will be over pounds 21,000.

Anne Feek, managing director of the School Fees Insurance Agency, says: "As it is, parents are reluctant for their children to start life with a debt. If tuition fees are introduced what option is there for parents who want the best for their offspring other than to fund their education themselves?"

It still seems an impossible amount to find. Yet many parents find that by investing a moderate sum now, they can offset the costs. Several companies offer specially tailored investment products aimed at saving for education. Look out for those that allow you to schedule payments when they fall due; it cuts out the pitfalls of arranging finance at the last minute.

The School Fees Insurance Agency offers a way of harnessing tax reliefs to let savers tap into growth in the stock market and maximise saving for education.

Each parent can put up to pounds 6,000 in a PEP that invests in shares every year. There is no tax on the investment growth of the fund - and no tax on payouts. Regular monthly payments are also an option.

The PEP can then invest in a unit trust that may generate much higher growth than simply saving in a building society. Over the last three years, unit trusts invested in UK equities generated an average growth of 32 per cent. Johnson Fry Slater Growth has grown by 82 per cent over the three years to April.

Investing money with an insurance company's fund can also deliver good returns. Over the last three years, the average growth in UK equity funds was 27 per cent.

If you believe this will keep up, you can sharply reduce the burden of raising cash when your child attends university. If you pay pounds 162 a month into a PEP, starting this year, your 12-year-old child could receive pounds 1,500 a term by the time they go to college in the early 2000s.

Many believe that these returns are unusually good and will not be repeated. Anyone who believes interest rates will rise significantly and stay there would be better off investing in fixed-interest stocks, which offer certain returns, albeit at a lower rate than equity investments.

Because PEP providers often have initial charges, it makes sense to invest over a long period - preferably at least five years. Savers who have five years but little to save may be better off with a tax-exempt special savings account or Tessa. This pays a tax-free rate of about 7 per cent a year at present, on savings of up to pounds 9,000.

For parents with children who may go to college sooner than that, some companies offer efficient ways of releasing any spare equity in your home.

The School Fees Partnership can refer people to an independent adviser able to advise them on the company's Special Reserve Plan.

This in effect re-mortgages the family home - cheaper than a second mortgage - and allows parents to draw money later from the capital which that generates.

All educational savings plans allow parents to use payments for other purposes if they wish.

So even if a child decides against attending university, the money will pay for that long-promised holiday, car or special treat.