On course for repayment

Paul Lewis / 20 September 2019

Many parents and grandparents worry about the huge ‘debt’ students incur. However, a student loan is not a debt in any normal sense of the word - Paul Lewis explains.



As new students enjoy Fresher’s week – though some, especially in Scotland, will already have arrived – their parents and grandparents are 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 for living costs such as rent, food, clothes, utilities, and all the fun things that student life should 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 stay-at-home students) and the typical graduation debt of £50,000 can easily be built up. It doesn’t sound a good way to start working life.

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Graduate tax

However, 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. So it is 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 is 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 is impossible to predict who will earn enough consistently throughout their life to be in the 17% who pay it off in full. So my advice is, do not consider paying a grandchild’s student loan.

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Further anomalies of the student loan

Another way student loans are different to 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 phone is a very good idea. These accounts – with new banks such as Monzo or Starling – keep instant track of all spending and analyse it into categories. That is very 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.

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Your contribution

The standard maintenance loan of £8,944 for students in England is means-tested on the income of the student’s parents, or one parent and their partner, and is paid in full if household income is under £25,000. If it’s more than that, the loan is progressively reduced, falling to £4,168 if household income is £62,210 or more. There’s no obligation on the parent to make up the difference, though most will.

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.

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Accommodation

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 affect the useful lesson of managing their own money though, so it may be better to encourage them to take a job in the summer or Christmas holiday or to work part-time during term.

Another alternative is to buy a home and rent it to the student plus friends. However, legal duties on landlords and new tax rules make buy-to-let much less attractive than it was. Unless you really want to be a landlord, actively manage the property, and fill in a tax return to cover it then I wouldn’t recommend it. 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 over-priced, come with hefty service charges, and are widely mis-sold – in fact, some have been sold and never built. Many people have lost money on these ‘opportunities’. Avoid them.

This covers English students going to university in 2019. Loans in other UK countries are different, as are loans taken out before 2012. For more information, go to gov.uk or moneysavingexpert.com and search ‘student loans’.

This article appeared in the October 2019 issue of Saga Magazine. 

Does it make sense to pay off a grandchild's student loan? Annie Shaw weighs in.




The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.