James Hambro research on student loans
The new university term starts soon and in many households there will be sharp intakes of breath as parents and students begin totting up the costs. What help does your child (or grandchild) get with funding and how much should you commit to support them financially?
Tuition fees in England are now up to £9,250 a year, which is covered in total by the tuition fee loan for full-time students, regardless of income. However, the maintenance loan is means tested. There are a number of inequities in the current student finance system and one of them is that parental income is taken into account when a student applies for maintenance support and yet parents are under no obligation to actually meet any shortfall. Parents can refuse to support their child at university, leaving them to struggle and having to take on part-time work that might jeopardise their academic success.
A family does not have to be very high-earning for a child to be forced on to the minimum maintenance grant level either, which is undoubtedly putting family finances under strain in many households – particularly when more than one child is at university. The loan application pays no regard whatsoever to how many students a family may be trying to support at university.
Using the government’s online student finance calculator*, we have established that the maximum maintenance loan available for those studying outside London is £8,700 a year and the minimum £4,054. It only takes the combined taxable income of a student and his or her parents to reach £62,215 for the student to be given access to no more than the minimum maintenance loan on most courses.
For those studying away from home in London the maximum maintenance loan is £11,354 and the minimum is £5,654. Families with a combined income of £69,859 or more will be eligible only for the minimum maintenance loan on most courses.
It is hard for parents who want to be supportive to know just how much to give. Online student forums suggest that living on the full maintenance loan is tight so a parent wanting to pay everything might want to allow £10,000 to £12,500 a year (depending on the place of study) for each year their child is at university. I have five children (the youngest graduated last year). In our case we paid for our children’s accommodation and travel costs and assumed the loans would cover the rest.
How do loans work?
Under the current system, student loans accrue interest from day one at 3% above RPI (the retail price index), which currently adds up to 6.3% a year. A student will only start paying off the loan when they graduate and begin work. Even then they will have to earn £25,000 pa before repayments kick in – they will pay 9% of any earned income over £25,000 pa.
If they suffer ill health and have to stop working, or decide to take a long career break to raise a family, they will pause repayments. Thirty years after the first loan repayments are triggered, whatever is left of the debt will be written off.
The reality is that most young people will never pay off their loan – and not just because of the outrageous levels of interest charged, which mean the debt ratchets up quickly over time. Many students will never pay even the amount they have borrowed. There is also some political uncertainty, with Labour pledging to abolish tuition fees and cancel existing student debt, though how they will be able to afford this is another matter. It means that even where families might be able to afford the whole costs it often makes sense for their children to take the maximum loans available.
The benefits of paying everything
There are, however, some sensible arguments for wealthier parents to meet all the costs of higher education.
Though a student loan is not considered a debt in the traditional sense, the repayment obligations do affect a graduate’s future disposable income and as affordability is usually taken into account by mortgage lenders it may impair their chance of taking out a mortgage. If your child goes on to work in a high-earning profession, there is also a much greater chance they will pay back more than they have borrowed and the long-term costs could be punitive.
The uncertainty around the future of loans works both ways too – the 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 will demand repayment in full.
As a result, many parents may feel very torn about what to do. A loan can be repaid in full at any time anyway, so parents struggling with this dilemma might encourage their child to take out the maximum loan and postpone the decision until they graduate. This will allow you time to see if they want to go on to further study – if they do a four-year degree the likelihood of them never having to pay what they have borrowed increases significantly.
Postponing the decision will also give parents a chance to see what profession their child enters and to see what the political future holds for student loans too.
An alternative strategy for a parent who has the cash available to pay all their children’s university costs is to give them the money towards a house deposit instead. Assuming their child is only eligible for the minimum loans and takes up the opportunity, this could free up as much as £45,000 towards a house – either when their child is at university (which may reduce living costs while studying) or upon graduation.
The current national average mortgage rate is around 4%. Reducing your child’s mortgage by £45,000 would save them £215 a month in mortgage repayments on a 30-year term loan. They would have to be earning £53,666 a year to pay £215 in student loans a month. £45,000, 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 save them more than 1% on their mortgage rate and help them even more.
* Source: www.gov.uk/student-finance-calculator; all figures correct at time of publication.
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