If your child is heading off to university soon, or if you’re thinking of taking your first degree or diploma course (there’s no upper age limit for student loans), it’s important to understand how you – or they – are going to pay. David Jones shares his suggestions.
We often get asked for advice on the best approach to student finance; if you’re a parent, should you pay the costs yourself and help your child avoid taking on debt, or encourage them to take out the loan and then pay it off in full for them, or take the loan and then let it run, perhaps on the basis that the child’s income may be below the repayment threshold?
This can be a complex area, and there’s lots of information at www.gov.uk/student-finance.
Alternatively, if you already know about the intricacies of student finance, you can begin an application at https://www.gov.uk/apply-for-student-finance
Here's a brief overview of the main rules, together with our suggestions for how to make the most of them to get the best value.
Please note that this only applies to those students beginning courses in 2020/21 or later; different rules may apply for those already at University.
Financing For University There are two main components to student financing:
Tuition Fee Loan – of up to £9,250 for a full-time student
Maintenance Loan – designed to help pay living costs
Other means of support are available in some circumstances, including financial hardship or disability, but in most cases, support will be restricted to these two. We thoroughly recommend checking what is available to you/your child before they begin their course.
Applying for Financing By now, you will have likely have already applied for student finance and the first instalment should soon be deposited. If you/your child have not yet applied for student finance, it is still possible to do so, however you will need to be efficient in completing the application and providing the required information and documents. Once your application has been approved, the applicant will be entitled to a tuition fee loan, as well as a maintenance fee loan. You can log into Student Finance to check the status of your application. Tuition Fee Loan The loan is paid directly to the educational institution in instalments at the start of each term to cover the cost of the course. The loan is repayable as part of the overall student debt.
Maintenance Loan This is paid into the student’s bank account at the start of each term and is intended to pay for living costs. The amount payable varies depending on living arrangements, as follows (all figures assume full-time courses):
The loan is repayable as part of the overall student debt. You can log into Student Finance to check the details of your instalments. Repayment Repayments will begin once the individual completes the course and starts a job, where their income from all sources exceeds the threshold. The earnings threshold for Plan 2 loans is £26,575/year (£2,214/month or £511/week) before tax. If income drops below this level again in future, the repayments will be suspended until this threshold is exceeded again. Once you earn more than the threshold, repayments kick in and you pay 9% on the amount over £26,575. So if you earn £30,575, you’ll pay 9% of £4,000 – which is £360/year.
You’re paid weekly and your income changes each week. This week your income was £600, which is over the Plan 2 weekly threshold of £511. Your income was £89 over the threshold (£600 minus £511). You will pay back £8 (9% of £89) this week. Example two Your annual income is £28,800 and you are paid a regular monthly wage. This means that each month your income is £2,400 (£28,800 divided by 12). This is over the Plan 2 monthly threshold of £2,214. Your income is £186 over the threshold (£2,400 minus £2,214). You will pay back £16 (9% of £186) each month. The loan can be repaid in part or in full at any time without any additional charge. Any loan outstanding 30 years after repayments first became due will be written off. The earnings thresholds should rise each year in line with average earnings. Any individual moving abroad will continue to be liable for the debt, which will be repaid with reference to an equivalent minimum income in their new country of residence. Interest Interest on the debt is charged from the date that the student or student’s educational institution receives the first instalment. Interest is charged at the following rates, dependent on the borrower’s position: While you’re studying, interest is 5.6%. This is made up of the Retail Price Index (RPI) plus 3%. RPI is currently set at 2.6%. This rate applies until the 5 April after you finish or leave your course, or for the first 4 years of your course if you’re studying part-time, unless the RPIchanges. After that, your interest rate depends on your income in the current tax year, examples of which are shown below:
What Should You Do? The best course of action will depend on individual circumstances, but in many cases the debt will begin to be repayable once employment has been found and, if we assume inflation (RPI) of 2.5% a year, the total interest payable will be between 2.5% and 5.5% per annum. Of course, inflation could be significantly higher or lower than this and, at the time of writing (September 2020) was 2.6%. Let’s assume that you have enough cash to repay the outstanding loan. Should you do so? Well, if you are a basic rate (20%) taxpayer, you would need to earn gross interest of between 3.1% and 6.9% on the cash to profit from keeping the loan in place. At the time of writing, the best available five year fixed rate bond from a UK bank would only produce 1.65% annual interest, so using the money to repay the loan could make sense. In fact, if you have the cash available it may be better to either avoid the debt altogether or repay it as quickly as possible, given that no early repayment charges apply. You should bear in mind that interest begins to accrue from the date that the first instalment is received, rather than the date at which the loan first becomes repayable. Wait and See? The interest rate is not cheap during the study period, compared to mortgage rates, for example. However, if the graduate takes up a role with a salary below the lower threshold, the interest charged is only equivalent to RPI. Part-time working or family career breaks might also reduce both the interest charged and the repayments for lengthy periods. Remember that any outstanding debt is written off after 30 years. In fact, the IFS (the Institute for Fiscal Studies) estimates that 83% of students with Plan 2 Loans will have some or all of their debts paid for by the government.
. If it is necessary to take the loans initially, but there is the option to repay them in full on graduation, it may be wise to wait and see which career path the graduate is heading down, before making a decision to repay in full or not. Other Considerations The cost of higher education isn’t the only thing that many of our clients would like to provide for their children, and a choice might need to be made between funding this or perhaps providing them with a deposit for their first property.
If you use your available resources ensuring that your offspring leaves university with no debt then their options for getting onto the property ladder might be limited especially with the level of deposit currently required. First-time buyers are currently putting down an average of over £40,000 as a deposit, and although the interest charged on the student loan isn’t cheap it might be less expensive than the cost of mortgage finance if that’s required later on. So this decision depends partly on your financial situation and future expectations.
If as a parent you have set aside funds for your children’s higher education and, possibly, to help them get onto the property ladder, you might consider keeping your options open by encouraging them to take the loans available. You will then have the choice post qualification to help them clear the accumulated student debt or to buy a property. It’s Not Just About Money It’s important to recognise that these decisions aren’t always simply about money (in fact, they rarely are). You might feel that an approach which makes clear to your children the cost of university education will help focus their minds more on study and help foster a spirit of self-reliance – one of the reasons for going to university in the first place. As always, clear intention and good communication is paramount, and it’s here that our Team at Woodgate Financial Panning can really help. Our expertise in ‘Values-Based’, family-oriented financial planning and long experience in helping people to make great decisions about complex issues can be really helpful in formulating a successful plan.
David Jones Chartered Financial Planner