Why you should think twice before paying off your child’s student debt?


September marks the return of students to schools and universities throughout the UK. After a turbulent summer for learners – with exam, followed by clearing chaos – daily life in educational institutions will look and feel different this autumn.

One thing that will remain the same, though, is the economic burden on students and parents alike.

Even if you’ve been saving on your child’s behalf for a long time, the cost of tuition fees, accommodation, and living expenses can soon mount up. A student loan will be the only choice for many.

We normally understand debt as something to be avoided. But if your child is heading to university this autumn, should you pay their tuition fees outright? And if your child’s course is now over, should you pay off their student debt?

The cost of university

Tuition fees for UK students embarking on undergraduate courses this year are £9,250 per annum.

With typical undergraduate courses lasting for three years, your child could leave university with a debt exceeding £27,000 for course fees alone.

Times Higher Education reports that ‘average student rent came to £547 a month’ in 2020. The figure rose to £640 a month for students living in London.

The report goes on to confirm that based on a 39-week contract and a three-year course, the average cost of rent is around £14,700.

Add the cost of living expenses – food, books, transport – and your child could return home with a mountain of debt.

Maintenance loans can help cover the cost of daily expenses, but these too will be added to the total amount of the student loan.

If you’ve been building a nest egg for your child for many years, it might be tempting to pay their university fees outright or to clear their debt on completion of the course.

But this isn’t always the best choice.

When is a student loan repaid?

Interest rates on Student Loans Company loans are small. Not only does your child not begin to repay the debt until they earn over a threshold amount, but they also only pay a percentage of the amount over that threshold.

If your child is starting university after 1 September 2020, the threshold amount of earnings is £26,575.

It only becomes payable the April after they graduate and even then, many graduates won’t start paying off their debt right away.

Depending on the salary your child goes on to earn, they may never have to pay their debt. After thirty years, any unpaid amount is written off.

Even if your child goes straight from graduation to a high-earning position, paying off their student debt may not be the best decision.

Why shouldn’t I clear my child’s student debt?

Your child might leave university as a high earner and need to make loan repayments straight away. If you can afford to wipe the debt for them, that’s great. Your child can use the money for more important things, like saving for a first home.

If your child has high-interest debt, however – credit cards, car loans, or an overdraft – paying this off for them could be much more beneficial in the long term.

A student loan has additional benefits compared to other debt your child might hold.

  • A student loan won’t show on your child’s credit report.
  • Because the level of repayment is linked to your child’s income, if they lose their job, they won’t make repayments. This could also free them up to take lower-paid employment while they await their dream job.
  • Non-repayment of debt secured against your home can lead to repossession. Your child won’t ever lose their home through non-repayment of a student loan.

Even if your child is debt-free, they might be saving for a house. Providing your child with the money to increase their house deposit could have a more positive impact in the long term, reducing their mortgage repayments for the rest of their life.

Get in touch

If you’d like to discuss saving a nest egg for a child, or how best to use your cash to help your child through university while still maintaining your financial stability, get in touch.

Please email info@investmentsense.co.uk or call 0115 933 8433.