Metis AM
If your child or grandchild is heading off to university this September, you’re probably experiencing lots of different emotions. It’s an exciting new chapter for them to embark on, but this also comes with some worries.
One of the things that can be concerning is the prospect of the student debt they could be faced with on graduation. If this is weighing on your mind, you may be wondering whether you should help them to repay their loan early.
This can feel like a sensible thing to do – after all, keeping debt to a minimum where possible is usually recommended. But the government has made some changes to the repayment terms for students who are starting their course this September (named “plan 5” student loans). This means that the question of early repayment is a little more complex than it might seem.
Read on to learn more about the factors that could influence your decision about whether to help your child pay off their student debt.
Start by understanding how much your child may need to borrow
When your child goes to university, they can apply for a tuition fee loan and a living loan.
The tuition fee loan is paid directly to the university and covers the cost of their course. The living loan helps your child pay their living costs such as accommodation, utilities, and groceries.
While the tuition fee loan is dependent on how much your child’s university charges for tuition (capped at £9,250 a year until the 2024/25 academic year), the living loan is means tested. If your household income exceeds £25,000 a year, your child will be eligible for a lower amount because the student loans company assumes that you will be able to supplement the loan to support your child financially.
This student finance calculator can help you to discover how much your child may be eligible to borrow for their living loan.
Remember that interest begins to accrue from the first day of term, so the amount that your child may owe by the time they graduate could be more than they originally borrowed. The interest rate for students starting their course in the 2023/24 academic year will be equal to the Retail Prices Index for each year.
Repayment terms depend on how much your child earns, not how much they owe
Repayments on your child’s student loan won’t start until the April after they graduate.
The amount they will repay each month is based on what they earn, rather than how much they owe. Students starting university in September 2023 will repay 9% of their annual earnings above £25,000. So, if they earn less than £25,000 (or £2,083 a month), they won’t have to make any repayments.
If they earn £26,000, they will repay £90 a year (9% of £1,000) regardless of how much they owe in total.
If your child started university in an earlier year and took out a student loan, they will be on a different plan, so their repayment terms may be slightly different.
If your child is likely to be a high earner, it may be worth considering paying off their student loan early
Students who start university in September 2023 and take out a student loan could end up paying off much more of their loans than previous generations of students. This is because the government has extended the period of repayments to 40 years.
Any outstanding student debt that your child has, including interest, will be written off after 40 years or in the event that they pass away or are unable to work due to illness or injury.
According to data reported by the Actuarial Post, a graduate whose £30,000 starting salary increases by 2% a year would repay a total of £27,180 over the required 40 years before the remaining debt is wiped. So, it’s possible that students who graduate in their late 20s could be making their final student loan repayments after they have retired.
If your child is likely to earn enough to be repaying their student loan for the full term of 40 years, and would pay back more than they originally borrowed, it might make sense to consider paying off their loan early.
If it’s unlikely that your child will repay their debt in full due to their earnings or other circumstances, it may not make sense to pay off the loan early. This is because you could end up paying for a loan that would never have been paid off.
It’s hard to be sure whether paying off your child’s student loan makes financial sense
Given the unusual nature of the student loan repayment plans, it’s difficult to know whether it makes financial sense to pay off your child’s student loan for them.
Even if it seems likely that your child will be in a position to pay it off in full, there are many factors that could influence how much of their student loan they repay over the course of their career. For example, they could choose to make a career change or take a career break.
Remember, though, that a student loan doesn’t go onto your credit file in the same way that other types of person loans usually do. This means that student debt is unlikely to affect your child’s ability to secure credit in the future.
Additionally, it is possible to overpay your student debt at any time. So, if you decide not to pay off the loan now but later decide it may be worth doing, this is always an option.
Get in touch
If you’d like to learn more about how you can use your wealth to support your family and create the lifestyle you dream of, we can help.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
