Student debt: What you need to know if children are heading to university
The summer months are here, and another group of teenagers are eagerly awaiting the results of their A levels to find out if they’ve secured a space at their chosen university. If your child or grandchild is among those hoping to gain a degree over the next few years, it’s a time that’s filled with excitement and proud moments. However, you might be concerned about the level of debt they’re taking on too.
Student debt is often talked about in the media, with graduates now embarking on their career owing huge amounts. But student debt doesn’t work in the same way that other debts, such as personal loans or credit cards, do. As a result, discovering more about student debts can help ease your worries.
How much student debt will they have?
For the 2019/20 academic year, universities can charge up to £9,250 a year for UK students in many parts of the country. With most degrees taking three years to complete, students can expect to graduate with £27,750 of debt for tuition fees alone. For some courses, students can expect to be studying even longer, increasing debt further.
Of course, this only considers the amount paid to the university, there are living costs too. The majority of students see university as an opportunity to gain some independence and move into rented accommodation. Maintenance loans can be applied for to help cover these expenses, the amount received will depend on living circumstance and location:
Once this is factored in, it’s not surprising that the average graduate in the UK carries more than £50,000 in student debt.
What interest is paid on student debt?
One of the areas that causes confusion about student debt is how and when interest is added.
Students going to university this year will be part of Plan 2. This means that whilst studying, the interest rate on student loans is the Retail Price Index (RPI) plus 3%. RPI is currently 3.3%, leading to an interest rate of 6.3% being applied. After finishing a university course, the level of interest added will depend on income in the current tax year. Those earning £25,725 or less will have an interest rate that matches RPI. For those earning above this threshold, the interest will be RPI plus 3%.
How is student debt repaid?
The scale of student debt and interest rates graduates are facing can make it seem like further education will harm their financial security. However, the process of paying it back is where student loans differ significantly to other forms of debt.
Repayments only start when graduates earn above a certain salary. For graduates that are part of Plan 2, they only start making repayments when their income exceeds £2,144 per month (£25,725 annually). Repayments are 9% of the income that’s above this amount, which is deducted automatically from paycheques. This means it acts more like an additional tax in many ways.
Spread out into monthly repayments, the amount paid towards a student loan is relatively small. For example, a graduate earning £27,000 would repay just £9.54 per month. If they were to earn a £3,000 rise, taking home an annual salary of £30,000, monthly student loan payments would increase to just over £32 a month.
The way student loan repayments work mean graduates only make repayments when they’re earning above the threshold. If they never earn above this amount, no repayments are required. Should graduates take a career break, to study further or raise a family, for example, repayments will also stop. If the full amount isn’t repaid within 30 years, it’s normally written off.
Should you provide financial support to cover university costs?
Whilst student loans aren’t paid back in the same way the other debt is, you may still want to offer a helping hand financially as your child or grandchild goes through university. Here, there are two important factors to consider: the impact it will have on your finances and how it will help the beneficiary.
Considering your finances: Whether you hope to give a one-off lump sum or ongoing support to loved ones heading to university, it’s important to understand how it’ll affect your own financial position. Taking a chunk of money out of your pension, for instance, may leave you financially vulnerable in the future. Taking a step back to fully comprehend the short, medium and long-term effects of your decisions mean you can proceed with confidence.
Delivering maximum impact: It’s also important to talk to the student here and understand how your financial help would have an impact on their financial security. For example, would it be better for you to pay a lump sum that will cover tuition fees or offer ongoing support that will help with day-to-day expenses? It’s crucial that you consider both the short and long term here, as well as alternatives. When you look at the bigger picture, you may decide that saving the money intended to help with university for a few years to help them get their foot on the property ladder will be more beneficial, for example.
If you’d like to discuss helping younger generations improve their financial security, whether through covering university costs or not, please get in touch. We’re here to help you understand the impact it’ll have on your own finances and the best way to lend a hand.