Don’t pay off your child’s student loan – why helping out may not make financial sense

According to the Higher Education Statistics Agency (HESA), there are currently more than 2.3 million undergraduate students in the UK.

If your child or grandchild is one of the estimated half a million new students heading off to university this autumn, you may be concerned that they are starting their working life in serious debt.

Student loans enable undergraduates to borrow the cost of their tuition fees and, in some cases, money to fund their upkeep while they are studying. It’s not uncommon for students to graduate with debts of £40,000 or more, but the way in which loans work mean it might not always make financial sense to repay them on your child or grandchild’s behalf.

Here’s your complete guide to how student loans work, and why using your money to help a child or grandchild in another way might be more beneficial.

How much a student can borrow

Every undergraduate can apply to receive a loan of up to £9,250 per year to pay for their tuition fees. Over a three-year course, this would total £27,750.

Students may then be able to get additional help with living costs by applying for a maintenance loan to cover some of their everyday living expenses.

The amount of maintenance loan your child/grandchild can get will depend on where they will live and study, and the household income.

For example, if your household income is £50,000 the maximum annual maintenance loan is currently £4,484 if the student is living at home, £5,905 if they are living away from home, and £8,659 if they are living/studying in London.

If your household income is more than £65,000 then the minimum loan limits apply. These are £3,410 (living at home), £4,289 (living away from home), and £6,649 (living in London).

Here’s an example. You live in Cheshire, your household income is more than £65,000, and your child/grandchild studies a three-year course at the University of Bristol.

If they took the total tuition/maintenance loan, they would owe £40,617 on graduation.

When a student loan has to be repaid

Students only repay their student loan when their income is above a certain threshold amount. This amount changes on 6 April every year.

The earliest they will start repaying is either:

• The April after you leave your course
• The April four years after the course started, if they are studying part-time.

There are two main student loan ‘plans’.

Plan 1

This is for an English or Welsh student who started an undergraduate course anywhere in the UK before 1 September 2012, or a Scottish or Northern Irish student who started an undergraduate or postgraduate course anywhere in the UK on or after 1 September 1998.

Here, the student will only have to make loan repayments when their income is more than £372 a week or £1,615 a month (before tax and other deductions).

Plan 2

This is for any English or Welsh students who started an undergraduate course anywhere in the UK on or after 1 September 2012.

Here, they will only have to make repayments when their income is more than £511 a week or £2,214 a month (before tax and other deductions). This is around £26,575 a year.

What the student loan repayments are

Student loans are only repaid when the graduate earns more than a weekly/monthly income threshold (as above).

The graduate pays 9% of the amount they earn over the threshold, irrespective of the plan they are on.

Here’s an example.

Your child/grandchild’s annual income is £28,800 and they are paid a regular monthly wage. This means that each month, their income is £2,400 (£28,800 divided by 12).

This is £186 per month over the Plan 2 monthly threshold of £2,214. They will therefore pay back £16 (9% of £186) each month.

Why it might make sense NOT to pay back a student loan

If your child or grandchild is set to leave university with a debt approaching £50,000 you may want to help them out by repaying some or all of their loans and enabling them to start work debt-free.

However, there are several reasons why it might make sense not to repay the loan.

A graduate will stop owing the debt on the first of the following events:

• The debt is cleared
• 30 years from the April after graduation have passed
• They die (student loan debts are wiped on death so aren’t passed on as part of an estate)

Even if the graduate earns above the £26,575 threshold (rising to £27,295 in April 2021) they may well never pay back their student debt, even in 30 years.

Consider the example above. If a graduate earns £28,800 and pays £16 each month, they will have paid less than £6,000 at the end of 30 years. Of course, this will be affected by salary increases and increases to the threshold, but it illustrates how even graduates on good salaries may never end up paying back their full loan.

As financial planners, you might expect us to suggest that you pay debts off as quickly as possible! So, suggesting you don’t use your capital to repay a student loan may look unusual. However, student loans are one of the rare cases where repaying them may actually be a bad decision.

There is a really useful student finance calculator on the Money Saving Expert website if you want to understand more about what a graduate might pay back based on various salary levels.

Let’s leave the final word to money expert Martin Lewis.

“Would a student say: “I’m not going to university, because if I’m a high earner afterwards they’ll ask me for a contribution to my education.” Of course not. They’d relish the financial success and be assured that if they didn’t do too well, they wouldn’t contribute as much or even nothing at all.

“The same is true of parents. Many say: “I’m worried my child will be £50,000 in debt when they leave university, I will do all I can to prevent it.” However, I’ve never heard anyone say: “I’m worried my child will earn enough to be a higher-rate taxpayer after university, I’m saving up now to pay their tax for them.”

Get in touch

If you are considering supporting a child or grandchild through university, we can help put a plan in place. Email info@depledgeswm.com or call (0161) 8080200.