We have two granddaughters at university. One graduates next summer and the other began her studies earlier this year. We thought that making a contribution to paying off their student loans would make a good Christmas present, but don’t know how to go about it.
There are two issues here. The first is the best way to hand over the money – should you make a payment to the Student Loans Repayment scheme or hand the cash to the girls for them to make the payment? The second, and much more important one, is whether it is a good idea to make early repayments at all.
Student loans for UK undergraduates are not like loans such as mortgages or credit card debts, where making a payment typically reduces the monthly payment or shortens the term of the loan.
Repayments are better described as a type of graduate tax, and how much you repay is determined not by how much you owe but by how much you earn. High-earners pay more each month and will indeed pay off the loan sooner than the lower paid. But low- earners or non-earners may pay nothing at all, and even medium- earners may not have repaid the full amount by the time the loan is written off under the rules.
If your grandchildren are likely to be low- or medium-earners after college, your contribution now could be a waste of money.
Read our guide to giving money to grandchildren.
The rules around repaying a student loan
The rules are not always easy to understand, but you can find more on studentloanrepayment.co.uk. Your family’s situation is further complicated as it looks as if your two granddaughters have borrowed under different loan regimes (the latest plan began in autumn 2012), so the calculations you need to do will be different for each of them.
The younger granddaughter will start to repay her loan only when she earns more than £21,000, when she will pay 9% of her wages above that threshold. If the debt isn’t cleared after 30 years it is written off.
Your elder granddaughter will repay 9% of earnings above £16,365, but the debt will be written off after 25 years (35 years in Scotland).
She is, however, being charged interest at an extremely beneficial rate. If ever she needed to borrow money in future for another reason – such as for a deposit on a flat – it is unlikely she could obtain a bank loan as cheaply as her student loan. This means that having money in her hand for these other needs – were you to give her a cash gift rather than repaying her loan – could be a much better idea in financial terms.
I recommend that you discuss the situation with your granddaughters to see what they would prefer.
Will your children get taxed on the money you give them?