University is a popular life choice for young adults, offering endless opportunities, a great education, and the chance to grow as an individual.
With higher education being the desired route for so many who are finishing school, it’s important that you understand how student loans work, when your child or grandchild has to repay them, and how much they might need to repay.
Read on to discover everything you need to know about student finance.
1. Tuition fee loans cover the cost of studies
There are two different loans offered to university students. The first pays for the education itself and is known as a “tuition fee”.
Tuition fees are set by the universities themselves and are paid directly to them. The government caps the cost of tuition fees in England at £9,250 for each year. Fees differ, however, in Scotland, Wales, and Northern Ireland.
At a total of up to £27,750 for a three-year course, most students require a loan to cover the costs.
Interest is then charged on the loan from the moment the university receives the first instalment. Recently, the interest rate has been capped at 6.3% by the UK government, as reported by BBC – this prevented an inflation-related rise to rates of 12% or more.
2. Maintenance loans can help with the cost of living
The second loan available to students is a “maintenance loan”. This is intended to be used as general financial support for living costs during a student’s study period.
The cost of living is an important factor to take into account while your child is studying at university and there are loans to help them afford this.
The amount a student is eligible to receive in their maintenance loan depends on different factors, including:
- Whether the student lives with their parents
- Whether they study in or outside London
- Whether the course has a year’s study abroad.
For example, during their study in 2022/23, a student could receive a maintenance loan of up to:
- £8,171 if they live with their parents
- £9,706 if they live away from their parents outside London
- £11,116 if their course has a year abroad
- £12,667 if they live away from parents in London.
A maintenance loan is paid in three separate instalments with the student receiving one at the start of each term. So, it is a good idea to speak to your child about budgeting and how to make their maintenance loan last. Otherwise, they could rely on you to provide further support.
Take advantage of the online calculator to find out how much your child might receive and whether they’re eligible for further support.
3. Repaying the loan can take years, but your child might not have to repay any of it
Repayment of the loan depends on the graduate’s earnings compared to the repayment threshold. Essentially, the higher the individual’s salary is over the threshold, the more they will pay.
However, it’s entirely possible your child or grandchild won’t repay a single penny.
Save the Student reports that, until the graduate’s gross annual salary exceeds £27,295, they are not required to repay anything. From 2023, this figure will reduce to £25,000.
Likewise, should the incumbent die without repaying the debt, or any or all the debt still exists after 30 years, the whole remaining amount is written off. From 2023, this will rise to 40 years.
Any English or Welsh resident who started studying on or after 1 September 2012 will be on “Plan 2”.
In 2022/23, students on Plan 2 will start to repay their loans at a rate of 9% on the amount their salary exceeds the threshold of £27,295.
This is how much these graduates can expect to repay each month according to their gross annual income:
- £27,294 a year will repay £0
- £30,000 a year will repay £20
- £35,000 a year will repay £58
- £40,000 a year will repay £95
Note that there are different repayment plans for Scottish students and those who started university before 1 September 2012.
4. There are alternative ways to fund a university course
Besides loans, there are other ways of financing university studies available to aspiring students.
Scholarships at university-level can be hard to come by although they are available. They are usually reserved for applicants with exceptional aptitude, perhaps combined with a lack of opportunity. In the case of a scholarship, the university will cover some or all the expenses of study.
Apprenticeship degrees are another great way to achieve a university degree without having the burden of paying for it. If they’re offered by an employer, they will typically bear the cost of the degree. This way, your child or grandchild avoids some of the debt and can come out with the same degree as if they had paid themselves.
Bursaries are offered by some universities and local authorities and these will often prioritise those with financial needs. Likewise, people who have lived in local authority care could be eligible for a grant of £2,000.
A part-time job could also provide a way to maintain financial stability while studying at university and would still allow your child to complete their studies.
5. Paying off a child’s student loans may not be the right approach for you
If you are uncomfortable with the idea of your child or grandchild being burdened with debt, you may want to do all you can to alleviate this.
However, repaying their debt in a lump sum might not be the best use of your resources. As you read above, there are circumstances in which your child won’t have to pay any of the loan back.
Firstly, there is no guarantee that they will earn over the repayment threshold that requires them to start repayment. Even if they do, they may only pay a small proportion of the total loan before it is written off after 30 years (rising to 40 years from 2023). And, if your child dies with the debt unpaid, it’s also written off.
Using your capital to help a child onto the property ladder, or to start a business, may be a more constructive use of the money than repaying debt which, in many cases, won’t ever be repaid anyway.
Indeed, the government themselves say that only around 20% of full-time undergraduates who started in 2021/22 would repay their loans in full.
Get in touch
If you’re wondering about the best ways to handle student debt and you’d like to discuss how best to support your child or grandchild through their studies, reach out to us so we can help you.
Please contact us via email info@investmentsense.co.uk or call 0115 933 8433.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
