As the university year ends and a fresh crop of students graduate, should you look to help your child with their loans, or even the costs if they are yet to attend?
As a parent with young adult children, you’ll be acutely aware of how much it costs to go to university these days. Day-to-day living costs aside, the maximum fees for university now stand at £9,250 per year in England. This cost is compounded by interest rates, which have risen massively since the Bank of England began its rate hikes in December 2021. Those on Student Loan Plans 1 or 4 pay 5.5%, while Plan 2 and postgraduate loans pay an eye-watering 7.1% currently.
As a parent, if you have the means to help a child with the cost of tuition fees, you might wonder if it is a good idea to pitch in. However, there are some important aspects to consider before doing so, that will affect both your child and your wealth planning.
How student loans work
To get to grips with whether you should soften the blow of student loans for a child or grandchild, it is essential to understand how the system works. Student loans and student debt does not function like normal debt. It does not affect a student’s credit rating, other than for overall income considerations when applying for a mortgage. Payment for the loan is taken at source, meaning there’s no need to manage the loan like you would with a normal debt. In effect, student loans actually function as a form of income tax levy. Once someone earns above a certain threshold, the Government deducts a portion of their wages to pay back the loan.
Here are the various income thresholds depending on the plan the student is on:
| Plan type | Yearly threshold | Monthly threshold | Weekly threshold |
| Plan 1 | £22,015 | £1,834 | £423 |
| Plan 2 | £27,295 | £2,274 | £524 |
| Plan 4 | £27,660 | £2,305 | £532 |
| Plan 5 | £25,000 | £2,083 | £480 |
| Postgraduate Loan | £21,000 | £1,750 | £403 |
Source: Gov.uk student loans repayment
As for how much you pay, this is calculated as 9% of your income over the threshold for plans 1, 2, 4 and 5. For postgraduate loans it’s 6%. This interest rate, in effect, is the additional income tax levy that the student with the loans takes, once they earn enough money. The debt is cancelled after either 25 years from the first April they were due to pay, or by age 65, depending on the plan. What is really critical here is that, because of the payment threshold and time limit on repaying, it doesn’t really matter how much debt the student has. They could have £30,000 or £3 million – they will only ever pay 6-9% of their income above the threshold of earnings. This is all entirely contingent then on what kind of career and income the student ends up having. Someone earning a lower level of income will pay less overall, whereas someone who goes on to earn a much higher income will pay much more of their loan back, or even all of it.
Other ways to help
The big question to ask yourself then is whether you want to help your child or grandchild avoid having to pay what is in effect an income tax levy on their earnings. Of course, if you do help this will aid their month-to-month earnings potential, but this is by no means a given depending on their career choices. There are other really valuable ways to help your child instead that could help them to achieve other goals such as owning a home. Contributing toward a house deposit could lower their mortgage costs and improve the options available to them in terms of property.
Other ways to help include gifting, which if done carefully following IHT rules, can be an effective way to help your child with ongoing living costs in small bitesize chunks. Putting money into a pension for your child can be a great long-term solution too, as this is often one of the most difficult things for a young person starting out in their career to appreciate the importance of.
Finally, if your kids are still younger and you’re just thinking about the future then contributing to a junior ISA can be a great way to set them up for success in young adulthood.