Should you pay back your children’s student loans?
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.