Universities are no longer free (ah the good old days) and they are now allowed to charge students up to £9,250 per year in tuition fees – ouch!!
Therefore students are allowed to take out tuition fee loans for the duration of their course, which are paid back when they start earning over a certain threshold. Plus there are also maintenance loans to help with the cost of living, depending on your household income.
So what are the rules and should you be paying off this debt for your children?
If your kids took out a student loan between 1st September 2012 and 31st July 2023 then they will be on Plan 2. If they took out a loan after this, then they will be on Plan 5. Both plans have a current interest rate of 7.6%.
On Plan 2, you start repaying your loan when your income is over £27,295 pa.
On Plan 5, you start repaying your loan when your income is over £25,000 pa.
You will repay 9% of your income over the threshold on both plans. So the repayments are based on your income, not on your loan amount. Therefore, most people will never pay off their loan by themselves.
Therefore, if you earn £30,000 pa and you are on Plan 2, you will repay
9% x (£30,000 – £27,295) = £243.45 pa (£20.29pm)
With Plan 5, you will repay
9% x (£30,000 – £25,000) = £450 pa (£37.50pm)
Plan 2 loans are written off after 30 years.
Plan 5 loans are written off after 40 years.
You will keep making the repayments until the loan is completely paid off, your earnings drop below the threshold, you get past the 30/40 years, or you die. Both plans are written off if you die!
Questions to consider when deciding what to do:
How much are your kids likely to earn when they finish university?
For example, a first year teacher’s salary (according to the National Education Union from April 2024) is £30,000 pa, so above both thresholds; so they are going to be paying back the student loan.
If the above teacher took out a loan for £27,750 to cover 3 years of fees, and we assumed that their salary increases by 3% pa, after 30 years they could have paid £54,757 back and then they will have their loan written off.
So a £27,750 loan has cost them £54,757.
If they started on £40,000, it could cost them £97,575.
If they started on £50,000, it could cost them £140,392.
However, will they decrease their hours and therefore their pay or take career breaks for any reason, such as having their own children? They would stop paying back the loan in these career breaks or if they earn under the threshold.
Do they want to buy a house?
The student loan affects how much you can borrow for a mortgage. The debt is not taken into account as an amount, but the amount you are paying back is, for affordability. If your student loan repayments are £100pm, then you have £100pm less to pay off a mortgage. If you paid off the loan for them would this help? Or would it be better to help them with a bigger deposit instead?
Inheritance Tax
Are your assets over the Inheritance Tax (IHT) allowance so that when you die, your beneficiaries / your kids will have IHT to pay? If so, then maybe you should pay off their student debt to help reduce your assets and a possible future IHT bill. Or maybe put this money into a pension for them instead?
