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Student loans have been making headlines, as frozen repayment thresholds and rising interest push up the cost for graduates. It’s no surprise that parents and grandparents are asking whether they should step in.
But student debt isn’t like a mortgage or a credit card, and clearing it early won’t suit everyone. Here’s what to consider before you decide to help.
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Student loans have been in the headlines since plans were announced in the autumn 2025 Budget, to freeze the repayment threshold for Plan 2 student loans for three years from April 2027.
Currently, holders of Plan 2 student loans – which were offered to English students between 2012/13 and 2022/23 – only need to start repaying their loans once their earnings reach £29,385. But rather than increasing in line with inflation, that repayment threshold will now not increase until April 2030.
The Institute for Fiscal Studies said that this would see borrowers earning over £30,416 pay an additional £93 in 2027/28, rising to £259 in 2029/30.
Repayments on loans are currently 9% of earnings above the threshold. So as earnings rise, the threshold freeze will mean borrowers’ repayments will be based on a larger proportion of their income.
Plan 2 student loans also apply to Welsh students (including current undergraduates), but the Welsh government is yet to confirm whether it will adopt the same freeze.
Adding to the problem is the fact that interest rates on all student loans are also tied to inflation – specifically the Retail Prices Index (RPI), which tends to run higher than the Consumer Prices Index (CPI). On Plan 2 loans the rate is means RPI plus up to 3% (there is a sliding scale, and the highest rate applies once earnings exceed £52,885).
This has prompted concerns that in some cases repayments may barely cover the interest, meaning that the original debt doesn’t go down and may even increase.
With inflation expected to rise again in the wake of the Iran war, the government recently agreed to cap interest at 6% on Plan 2 and postgraduate loans for the 2026/27 academic year.
Danni Heweson, head of financial analysis at AJ Bell, said that while the measure was welcome, it didn’t go far enough. “Proactively introducing a cap will help alleviate some of the worry facing young people, but it stops massively short of tackling a system which is fundamentally broken.
“Whilst the cap will stop rates spiralling, the use of RPI as a measure seems massively unfair to all students, including those about to make the first repayments of the new Plan 5 loans.”
Plan 5 loans, which started in England in 2023, are designed to put a higher proportion of the cost onto graduates rather than the taxpayer. So the threshold for repayment is lower, at £25,000, and they only get written off after 40 years, not 30. Everyone with a Plan 5 loan pays the same amount of interest, which is the RPI.
Scottish students who took out a loan since 1998 are on a different system called Plan 4. On this system, graduates pay 9% of the income they earn over the salary threshold of £32,745. The interest rate charged is either the Retail Price Index or the Bank of England base rate plus 1%, whichever is lower.
Previously, the Welsh student finance system matched that in England. But the Welsh government says that Plan 5 loans are regressive because they shift more of the burden onto lower-earning graduates rather than higher earners, so it has decided to retain the Plan 2 system.
Whether you have a grandchild at university or a child who’s still repaying their loans years after they graduated, you won’t be alone if you’re worried about the impact of student borrowing on their finances.
Jemma Slingo, pension and investment specialist at Fidelity International, says: “Parents and grandparents are now asking themselves the same thing. Should they help clear student debt? And should they discourage younger family members from taking it on in the first place?”
While you might have a strong desire to help, there’s a lot to think about first.
Student loans don’t work in the same way as commercial loans. In many ways they work more like a graduate tax. You only start to repay once your income reaches a certain level. If you haven’t finished repaying your loan within a certain period of time, the debt will be written off.
When that happens will depend on the plan your child or grandchild is on. Plan 2 loans are written off after 30 years of repayments, but newer Plan 5 loans (2023 onwards) are only written off after 40 years.
As a result, Alan Barral, financial planner at Quilter Cheviot, says this means families need to consider whether it makes financial sense to pay off a loan early.
“For some borrowers, particularly those who will never repay the full amount within the loan term, paying off the balance early offers no real financial advantage,” he explains. “But for graduates on faster-rising earnings, who are likely to clear the loan in full, early repayment can reduce a significant long-term drag on disposable income. The difficulty is understanding which camp someone falls into, because the repayment outcome depends on earnings patterns, rather than the size of the loan itself.”
Carl Green, financial planning director at Evelyn Partners, adds: “Graduates with patchy earnings, career breaks or long spells below the repayment threshold are much less likely to ever repay in full. Higher earners may clear their loans, but often at a very high total cost once years of interest are taken into account.”
According to government forecasts, only 56% of undergraduates starting university in 2024 will ever fully repay their student loans.
For those who started in 2022 – who are on the older Plan 2 agreements – the number is much lower, at 32%.
Before you offer any help to younger generations, Green says it’s important to check your own life jacket first.
“I am always cautious about parents or grandparents undermining their own financial security to deal with student loans. You need to be confident that your retirement income is secure, that you have sufficient accessible savings and that future costs, including care, have been properly considered. Once money has gone towards a student loan, it cannot be recovered if circumstances change.”
If you can afford to help, the next step is to calculate whether it makes financial sense to pay off a student loan early.
Green says: “Working out whether it is worth helping means looking properly at the detail. That includes the size of the loan, the interest rate, current earnings, likely career progression and how stable that income really is.
“For someone on a strong upward career path, who will clearly repay the loan in full, early repayment can save a meaningful amount of money, sometimes running into tens of thousands of pounds in interest over time. For many others, particularly lower and middle earners, the maths simply does not stack up.”
You also need to look at which plan applies, to understand what the rate of interest is likely to be. Under plan 2, higher earners pay a higher rate of interest (up to 3% above RPI). Under plan 5, everyone pays the same rate of interest, which is the RPI.
You should also consider other factors, such as whether your child or grandchild is trying to get a mortgage. A student loan doesn’t appear on a credit report, but it does affect someone’s disposable income, so lenders will factor it into how much they are willing to lend.
It’s worth considering whether there are other ways to help and discussing it with your child or grandchild. You don’t necessarily need to help pay off a loved one’s loan to give them some more financial breathing space. Green says: “In practice, some families decide their money is better used elsewhere. Helping with housing costs, childcare or general living expenses can often have a far more immediate and tangible impact than focusing on a student loan balance that may never be repaid in full anyway.”
“Whatever you decide, don’t forget about tax,” says Slingo.
While generous gifts can help reduce a potential inheritance tax bill, they need to be thought through. Large, unplanned gifts could be subject to IHT, if you die within seven years.
One way to get around this is to make the most of gifting allowances over time. She adds: “IHT gifting rules let you give away £3,000 each tax year without it being added to the value of your estate. This is known as your ‘annual exemption’ and it can go to one person or be split across several people. The sum rises to £6,000 if you did not use your previous year’s allowance,” she explains.
This allowance can effectively be doubled if you’re married or in a civil partnership as you’ll have two sets to use between you.
Lee DeRedder, a financial planner at Shackleton Advisers, says another option is to make regular gifts from income. Rather than paying off the loan, you could assist with repayments instead. “As long as this does not affect your standard of living and is affordable, such gifts will not be taxed under the IHT regime, and you could make gifts to cover the amount of the student loan payments each month.”
IHT planning is complicated, so if you wanting to combine helping the younger generation with estate planning, it’s essential you take professional advice.
Saga Legal has partnered with Co-op Legal Services, who provide regulated legal services, helping to ensure you have the right level of support and protection for yourself and your family. They can give advice on topics including how a will could reduce the impact of any potential inheritance tax, and why a trust will might better protect your home and savings. You can book a free legal review to get the guidance you need. After your free review, if you choose a product or service, they’ll explain any fees and costs to you clearly.
You can only use the free legal review service if you live in England and Wales. If you’re in Scotland or Northern Ireland, you can get estate planning help from Co-op Legal Service’s trusted partners.
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