Should you pay back your children’s student loans?

0
Written by:
26/06/2017
The interest payable on student loans has hit new highs, thanks to rising inflation. The temptation for parents is to pay off their children’s debts where possible, but is this the right course of action?

Interest rates on tuition fees are now over 6%. Assuming graduates build up £12,000 a year or so in tuition fees and maintenance loans, the debt grows pretty quickly. After 10 years, that debt would be worth around £21,832 and after 20, an eye-watering £39,722 (assuming no repayments). And that is just one year’s fees.

This is an oppressive level of debt for someone starting out in life and parents will be keen to help their children avoid it. Many may also look at the interest rates and reason that they could remortgage for far less: The lowest mortgage rate is currently under 1%.

However, there are reasons not to pay, notably that – according to the Institute of Fiscal Studies – two-thirds of students never pay off their debt. Students don’t need to pay back their loans until they reach £21,000 of income. From there, they will pay back 9% of their income. Only those earning £41,000 or more will be charged the full interest amount of 6.1%. Student loans are wiped out after 30 years, and for many people their salary will never catch up.

As such, for many families it will be a tough choice as to whether their children will ever earn enough to have to pay it off. This might not always be the obvious subjects. According to the Department of Education, the top 10 degree subjects for high salaries are medicine and dentistry, economics, veterinary science, mathematical science, engineering and technology, nursing, computer science, architecture building and planning, business & administrative studies, medicine-related subjects. English, the creative arts and agriculture were near the bottom of the list.

There is also the question of whether children might take a career break at some point. If people take time off to raise children, this would also defer student loan repayments.

However, there is another concern. As has been seen during the general election, student loans are a political football. The 30-year student debt forgiveness only exists by the grace of governments. While it seems unlikely in the current political climate, it is plausible that this would be removed by future governments. Those who have high and mounting debts would be vulnerable to any change in government policy.

There is no right answer because no-one knows what children will earn in future. Once they hit the threshold, the quantity of debt starts to matter – they may be paying 9% extra for just a few years, or a lot of years. If the latter, it will act as a drag on their ability to buy a home or support a family, at a time when wage growth is weak.

It does not have to be a one-or-the-other option. It may be better to hedge their long-term exposure by paying half their fees – more manageable for you, and less onerous for them.

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Which ISA is right for you? A round up of the six products available in 2017

From cash to innovative finance to lifetime, here's our guide to the ISA products available to savers this yea...

Guide to buy-to-let tax changes

In late 2015, former Chancellor George Osborne announced a range of  tax measures aimed at landlords, which t...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Five fund tips for a 0.25% interest rate environment

With interest rates stuck at a record low 0.25% and expectations rates could fall to close to zero, here are ...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Investing your money

Alliance Trust Plc gives you smart insight into how to invest your money

Money Tips of the Week

Read previous post:
buying a car
Five unexpected costs of car finance to avoid

Cars are a major expense for Brits, so it’s important to be savvy to help keep costs low. If you’re...

Close