As the cost of being a student rises their parents and grandparents are increasingly worrying about how they can best help them cope financially.
Many Saga readers ask me, Should I use my savings to pay their student loan? The answer is simple: no. Undergraduates get a student loan funded by the Government to pay for tuition fees (there are no fees in Scotland for Scottish residents) and another loan to pay for their living costs such as rent, food, clothes, utilities, and all the other fun things that student life is supposed to bring.
Many parents and grandparents worry about the huge ‘debt’ students incur. Tuition fees of £9,250 a year for three years (for students from England, slightly less in Wales, a lot less in Northern Ireland, and nothing in Scotland) add up to nearly £28,000. Add a maintenance loan of £8,944 a year (more in London, lower in other parts of the UK or for students living at home) and the typical graduation debt of £50,000 can easily be built up. It does not sound a good way to start working life.
Student loans aka 'graduate tax'
A student loan is not a debt in any normal sense of the word. It is paid back through the tax system as an extra 9% tax on any income above £25,725 a year. Interest is added each year. After 30 years, any remaining loan and interest is written off.
With this in mind, it’s best thought of as a graduate tax that lasts from the April after graduation for the next 30 years. Five out of six graduates will never pay off all the loan in that time, so it’s not good sense to pay it all off early.
You will pay the full amount, whereas your child or grandchild will almost certainly not. If you really want to help, you could wait until they get a job and then pay the 9% tax as it occurs each month.
It’s impossible to predict who will earn enough consistently throughout their life to become among the 17% who pay it off in full. So it’s probably wise do not consider paying a grandchild’s student loan.
Other ways to help a student financially
Further anomalies of the student loan
Another way student loans are different from other debts is that they don’t appear on credit records when a graduate applies for a mortgage or bank loan. Repayments will affect available income when the affordability of the loan is assessed, though, and that extra 9% tax could reduce the amount they can borrow.
Students who go abroad also have to make repayments on their student loan themselves, and there’s a separate income limit for every country to reflect local pay. But even if repayments aren’t made, their credit rating still can’t be affected.
A current account using an app on their smartphone is a very good idea. These accounts - with banks such as Monzo or Starling - keep instant track of all spending and analyse it into categories.
This is helpful for keeping track of how much is spent and on what. Make sure the firm offering the app and account is a proper bank and covered by the Financial Services Compensation Scheme.
What every teenager should know about money
Find out what your contribution will be and try to make sure your student gets at least as much as the full maintenance loan. If you can’t manage it, this could of course be done by another relative.
Often it’s still not enough to live on. In some parts of the country the fees for a university residence can take most or even all of it. So parents who can afford to, will want to pay more - or ask grandparents to chip in.
One way to help is to pay the rent and leave the loan for the rest of the student’s expenses. That at least means they won’t be homeless.
It does however affect the useful lesson of managing their own money, so it may be better to encourage them to take a job in the summer, Christmas and Easter holidays or to work part-time during term.
Another alternative is to buy a home and rent it to the student and their friends. However, legal duties on landlords and tax rules make buy-to-let much less attractive than it once was.
Unless you really want to be a landlord, actively manage the property, and fill in a tax return to cover it then this might not be for you. If you can afford to buy the student somewhere to live by themselves that might be better, but remember the value of property goes down as well as up.
Never consider offers to buy a new-build student flat that promises good returns in the future. These are usually overpriced, come with hefty service charges, and are widely mis-sold. In fact, some have been sold and never even built. Many people have lost money on these opportunities. Avoid them.
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