Getting a university degree can be a great way for your children to access a world of new opportunities, but to do so can require racking up a considerable amount of student debt.
If you have children who are currently studying, or have recently graduated, you might be concerned about how that debt could hamper their start in the world of work.
Some parents choose to help their children financially by paying off the loans, but this isn’t always the right decision for everyone. Read on for everything you need to know about these loans, as well as the pros and cons of paying them off.
Student loans can add up to a significant amount, especially with a long course
When a student attends university full-time, they can apply for government loans to pay for their tuition fees. They can borrow up to £9,250 per year, which means that for an average course which lasts for three years, they could owe up to £27,750.
Furthermore, students can also apply for a maintenance loan to get help with living costs and cover some of their everyday expenses. The total amount of maintenance loan depends on factors such as where your child is studying, as well as your household income, as it is assumed that you will help them financially.
For example, if your household income is more than £65,000 then your child can only apply for the minimum amount of maintenance loan. This means they could get £3,410 if they live at home, £4,289 if they live away from home, or £6,649 if they are studying in London.
These loans can all add up to a significant amount, especially if your child does a course that lasts for longer than three years. Please bear in mind that only tuition fees and maintenance loans need to be repaid while grants and bursaries do not.
Your child will only have to repay the loans if they earn over a certain threshold
Once your child has graduated, they will have to pay back the loan. Once your child earns over a certain threshold, £27,295 in England and Wales and £19,895 in Scotland and Northern Ireland, the government will deduct 9% of their paycheque each month for repayments.
However, it’s important to bear in mind that these thresholds do change between tax years – if they go up, your child may end up paying less back each month. While this might seem good from their point of view – as there are less deductions from their wages – the debt will continue to grow.
Due to the sheer size of your child’s student loans, the interest on them can add up to a significant amount each year.
If your child attended university after 2012, then the interest on their loan will work on a sliding scale depending on their income. Typically, it is between the Retail Price Index (RPI) and the RPI plus three percentage points.
There may be more effective ways to help your child than paying their student loan
One of the main drawbacks of having these loans hanging over your child’s head is that it may hinder them financially. As a parent, you’ll probably want them to have the best start once they’re ready to fly the nest, which is why you might want to consider repaying these loans on their behalf.
For example, while the loan doesn’t directly impact their credit score, lenders tend to take the cost of student loan debt into consideration when deciding whether to offer mortgages. If your child still has a significant amount left to repay, they may struggle to take their first step onto the property ladder.
Furthermore, not having 9% of their salary deducted each month can help them to build up a greater amount of financial resilience, so they can absorb economic shocks better.
However, while these are all good reasons, you may also want to think carefully about whether it’s the right decision for you. If your child has debts with a higher rate of interest, such as a credit card, it may be a sensible decision to pay this back first.
It’s also worth remembering that student loan debt is forgiven after 30 years, or 25 in Northern Ireland.
If you aren’t sure whether repaying your child’s student loans is the right financial decision, you may benefit from seeking professional advice.
Working with a financial adviser can help you to make informed decisions regarding your finances and allow you to manage your money in the most effective way possible. They can help you to clearly assess whether paying off your child’s debt is the best way to help them, or if there are better ways to do so.
Get in touch
If you’re considering repaying a child’s student loans but aren’t sure if it’s the right decision for you, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
