Tackling (or preventing) your children’s student debt
The uncomfortable facts
£27,000 or more is a big sum of money. For many parents, the thought of their fresh-faced offspring entering the world of work already owing that much is worrying. What happens if they’re on a low income? What if they lose their job? It’s natural to want to help your children out of it.
How much are we talking about?
Student loan repayments only start when your child’s income goes above £21,000 per year. If they earn less than that, they don’t have to make any repayments.
Once they earn above £21,000, they will pay back 9% of any income above that. The interest on the loan is charged at the rate of inflation, plus up to 3% depending on their income:
- If annual income is £22,000, monthly repayments will be around £7.50, with interest charged at the rate of inflation
- If annual income is £60,000, monthly repayments will be around £292, with interest charged at the rate of inflation plus 3%
They have 30 years to pay back the loan. After that, it’s written off.
So the cost of a university education can be spread over up to 30 years of your child’s working life, with repayments of less than 10% of their income and the loan written off if they don’t earn enough to repay it in that time. And of course the more they earn, the sooner that loan will be paid off in practice. It doesn’t sound quite so unmanageable now, does it?
Other things to think about
- The more financially successful your child is, the more they will repay each month and the sooner their loan will be paid off.
- If they lose their job or income reduces, repayments will reduce accordingly.
- Because contributions are taken out before their salary is paid (as with income tax), nobody will chase your child for payment.
- Repayments stop after 30 years, regardless of how much has been repaid.
- Student loans don’t appear on a credit file, so they shouldn’t affect mortgage applications.
- As with any loan, interest on student loans does mean that your child will pay back more than the original amount borrowed.
I still want to help them out. How?
Would you worry about your child one day becoming a higher-rate taxpayer so much that you offered to pay that extra tax for them? No? Yet this is in effect what you are doing if you pay off your child’s student loan immediately.
We can’t predict the future – for a multitude of reasons, your child may end up not earning enough in the next 30 years to pay off the loan, in which case any remaining debt would have been written off.
If you want to help your children with debts, it makes sense to contribute to something more immediately necessary, with a higher interest charge than the student loan, or a shorter repayment term. You could:
- Help clear any credit card debt
- Contribute towards rent or a deposit on a home
- Contribute towards the cost of a car
I still want to help clear their student loan
Payments you make to the Student Loans Company (SLC) will be in addition to those made by your child through PAYE or self-assessment. Your child will need to set them up as only they can deal directly with the SLC.
There are several ways you can make voluntary payments. You can:
- set up a direct debit
- pay online
- send a cheque with your child’s student reference number on the back
Whatever you decide to do, it’s worth remembering that the link between repayments and earnings makes a student loan a low-risk, relatively cheap form of borrowing. There’s little sense in your child stretching their finances to pay it off early if that means they run up an overdraft or credit card bill.