“My children will individually be £50,000 in debt at the end of their three year university degree. They will now have to contend with 6.1% + per year of interest on the debt and so will struggle financially to pay off this sort of liability once they have completed their studies! We’ve decided that we will settle their student debt from our savings.“
In most instances, this approach will not be the best course of action.
Students will be much better off applying for a student loan to fund tuition fees (£9,250 p.a. for 2017/18) and accepting the maximum maintenance loan to fund their living costs, part of which is means tested. They then only start repaying the loan in the April after they have completed their university degree if their earnings are in excess of £21,000 p.a., at a fixed rate of 9% on the excess over the £21,000 p.a.
Let’s look at two examples:
|1.||· £23,000 per year gross earnings|
· £23,000 – £21,000 = £2,000
· £2,000 x 9% = £180
· So £180 per year is the cost of the servicing the student debt
|2.||· £31,000 per year gross earnings|
· £31,000 – £21,000 = £10,000
· £10,000 x 9% = £900
· So £900 per year is the cost of the student debt
Paying back at these typical levels means that students are unlikely to ever pay back the full amount borrowed as currently, student debts will be wiped out after 30 years. With this in mind, it therefore normally makes very little difference if the student debt is £27,000 or £50,000.
It might be worth changing the language and viewing student loans not as a debt but as an additional tax or a contribution towards each student’s education which increases gradually as their earnings increase as they climb the career pyramid.
Some More Facts
- Interest charged on the debt will often make little difference as only 9% on earnings over £21,000 p.a is paid each year.
- Student loans are repaid through the income tax system by deductions via payroll (PAYE); for the self-employed this is done via HMRC’s self-assessment scheme
- Student loans taken out after 1998 will not appear on credit reference files so should not affect the ability to apply for loans or credit cards
- Applying for a mortgage is now largely based around affordability so having student debt in itself will not preclude anyone from making a successful mortgage application
- It is worth noting the higher the earnings are post graduation, the more likely it is that the debt will be repaid
- Earnings of £21,000 p.a. means any money from employment or self employment and in some cases earnings from investment and savings
- With this in mind, why pay off a debt early which in fact may never need to be paid off in full during the 30 year term?
- Why give up control of your capital today, say £50,000 from our earlier example, for a debt that might be wiped out?
- Remember, nothing will need to be paid if earnings are below £21,000 per annum
- You may well be much better off using your capital lump sum to assist your children with funds towards a deposit on a property rather than funding a debt which in many instances will be wiped out
- Scottish, Welsh and Northern Irish students studying in their own countries or in England will receive their financial support from their ‘home’ devolved administration so these rules will differ
- Rules are made by the UK Parliament so can change at anytime (and retrospectively)
- This article applies to student loans taken out in England since 2012