Working hard and earning a university degree will likely be a significant milestone in your child’s life. While it is an outstanding achievement, there’s a chance they may accrue substantial debt along the way.
The rules surrounding student loans changed in September 2023, bringing down the earnings threshold and extending the maximum term length of the debt. As such, you may be concerned about how this debt could weigh your child down as they begin their adult life.
Even though some parents decide to help their children pay off their loans early, you may want to think twice before you do so. Continue reading to discover how the new changes to student loans work, and the benefits and downsides of helping your child pay off their debt early.
Rules surrounding student loans changed in September 2023
From September 2023, the rules surrounding student loans changed. New “Plan 5” loans launched for anyone starting higher education after 1 August 2023.
Under the previous “Plan 2” system, graduates who still have student debt after 30 years of finishing their course are no longer liable for repayments and the debt is written off. Now, under the new Plan 5 rules, this 30-year term has been extended to 40 years.
The government says it introduced this reform to ensure “value for money” for the taxpayer, though it may mean that low- and middle-earners could still be repaying their student loans well into their 60s.
Moreover, the earnings threshold at which graduates from England become liable to start repaying their student loans has dropped from £27,295 to £25,000 under the Plan 5 system. On the plus side, the interest rate on the amount borrowed has decreased to the Retail Prices Index (RPI), rather than Plan 2’s “RPI plus 3%”.
Even though the interest rate on student debt has decreased, the new Plan 5 system essentially means that loans will be more expensive. In fact, MoneySavingExpert states that:
- Under Plan 2 rules, the government contributes 44p for every £1, and only 23% of borrowers are likely to clear their debt in full
- Under the new Plan 5 system, the government contributes 19p for every £1, and 52% of borrowers are likely to clear their loans in full.
Whether your child is a new starter and faces the Plan 5 rules, or completed their course before September 2023 and are still paying off their debt under the Plan 2 system, you may be wondering whether you should help them pay off their student loans early. Read on to discover the interesting benefits and downsides of doing so.
Your child could enter their adult life debt-free if you help them pay off their loans
Perhaps the main benefit of helping your child pay off their student loans early is that they could enter their adult life debt-free, potentially lifting a weight from their shoulders.
In addition, if your child predicts their salary will reach a level that means they’ll end up repaying their loan in full, and they haven’t any other more pressing debts or financial commitments, it may be worth helping them repay their loan early. By doing so, they could avoid extra interest accruing on the debt.
Also, while student loans don’t affect your children’s ability to borrow money for other milestone purchases, such as a home, lenders do consider it when calculating their affordability.
There are several reasons you may want to think twice about helping your child pay off their loan
Certain scenarios exist that mean your child would not repay their student debt. These include:
- If their salary is under the earnings threshold – this is £27,295 for students on Plan 2, falling to £25,000 from August 2023 for Plan 5 loans
- If any balance is outstanding 30 years from graduation on the Plan 2 system, or 40 years under the new Plan 5 rules
- If they pass away.
Since several conditions would mean your child may never pay off their loan, it may be best to consider alternative uses for a lump sum rather than repaying the loan.
Even if they earn above the earnings threshold – say £30,000 – they only pay 9% of their earnings between £25,000 (or £27,295 if they are on a Plan 2 loan) and £30,000. This might get them nowhere near to paying back the loan in full after the 30- or 40-year term.
Instead, your child could use the money that would have initially paid off their loan elsewhere, potentially helping them invest in their future.
For instance, the Commons Library reveals that the forecast average debt for the cohort of borrowers starting their course in 2022/23 is £45,600. Yet, instead of repaying their loan, any financial help you provide could instead be drip-fed into savings and investments to help your children save for future goals, such as the deposit for a home or bolstering their retirement fund.
Additionally, this money could be better off in an emergency fund, ensuring that your child has a robust financial safety net in place to protect them from any unexpected events.
Before any of this, it may be prudent for your child to pay off any other high-interest debts they have first, as these can quickly snowball and accumulate significant value.
Speak to a professional before you make any decisions
As you can see, whether you should help your child pay off their student loan early depends on their likely salary and any future financial goals and milestones, and this will be different for everyone.
So, if you still aren’t sure whether helping them pay off student debts is the right decision, it may be prudent to speak to a financial adviser first.
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