As the start of the new university term looms many parents and grandparents may be looking at the debts their loved ones are about to start accruing and wondering how they might help.
The days of students having a free university education and subsistence grants are long gone. Today’s students are expected to pay universities up to £9,250 a year for their education and then find the living costs on top. These are likely to be somewhere between £9,000 and £12,000 a year.
It means that a three-year degree can easily cost over £60,000.
You don’t have to pay all this
A would-be student can apply for two loans. The tuition fee loan covers the university’s annual bill. It goes directly to the university and is not means-tested.
Students can also apply for a maintenance loan to help with living costs. This is means-tested and tapers according to parental income. Maintenance loans go up to a maximum of £11,672 for a student living away from home in London, but many families will find they hit thresholds that reduce their maintenance loans to a minimum.
|Maximum maintenance loan||Household income threshold that reduces maintenance loan to minimum||Minimum means-tested loan|
|If student is living at home||£7,529||£58,215||£3,314|
|If student is living away, not in London||£8,944||£62,212||£4,168|
|If student is living away, in London||£11,672||£69,888||£5,812|
Source: Household income thresholds taken from Student Finance England. Note these figures are for English students
There is no legal requirement for families to make up the shortfall between the means-tested maintenance loan and actual living costs, but many will. Families whose household income takes them to the minimum loan threshold (and that will be a lot of families) can expect to have to pay over £18,000 supporting each child through university.
Repaying the debts
Grandparents may want to help with this. But there will be lots of parents and grandparents asking whether they should be stumping up all the cash to save their loved one taking on these hefty loans – likely to be at least £40,000. That is especially the case when you see how much interest is being accrued from the first day the loans are taken out.
Student loans accrue interest at 3% above RPI (the retail price index), which currently adds up to a punitive 6.3% a year.
Repayments start the April after graduation but only when a graduate’s annual pay cheque exceeds £25,725. They are set at 9% of earned income above £25,725 and normally taken out of wage packets automatically. Repayments are paused if the graduate stops working. After 30 years any debts still outstanding are written off.
Don’t think of this as debt
Because of the way the system works, it’s easier to think of this as a graduate tax rather than debt repayment. Many students will never repay the full amount before the debt is written off. And there is an albeit faint chance that a future government might even reduce or write off the debt. It means that families choosing to pay all university costs from the outset may pay thousands more than necessary.
That said, there are a few sensible arguments for families with the wherewithal to cover the costs. For one, student loan repayment obligations affect a graduate’s future disposable income, which can in future be taken into account by mortgage lenders. Secondly, if your child goes on to work in a high-earning profession, they are much more likely to have to pay back the debt and interest.
Finally, loan terms are subject to change and if your child is ever considered to be in breach of the repayment terms (even if by accident) there is the chance that the loan company would demand repayment in full.
Wait and see
Undecided parents may be better off postponing the decision until their child graduates. The loan can be repaid in full at any time, and waiting will allow you to see if your child wants to go on to further study (which might make the likelihood of their paying off the debt even more remote). It will give you an inkling as to what profession they wish to enter too and their likely earnings.
Putting the money towards a house instead
A better use of family money might be to go towards a house deposit. Let’s take an undergraduate who studies for three years away from home who is only eligible for the minimum loans. They are likely to borrow around £44,000. You could pay that or let them take on the debt and instead give them £44,000 towards their first house.
The current national average two-year fixed-rate mortgage with a 95% loan-to-value ratio costs 2.95%. Reducing your child’s mortgage by £44,000 would save them £184 a month in mortgage repayments on a 30-year term loan. They would have to be earning £50,258 a year to pay £184 in student loans a month.
£44,000, added to any savings your child might have for a deposit, could also help tip the loan-to-value ratio of the mortgage to below 75%, which can currently save them nearly 1.3% on their mortgage rate and help them even more.
Of course, everyone’s circumstances differ so it may be worth exploring this with your adviser. My own view is that you shouldn’t go paying off those university costs just because you don’t like your loved ones having “debts” and without giving thought to whether your generosity might be better placed elsewhere to help them.
By Charles Calkin
Posted on 10 September 2019
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