As a parent, I want the best for my children and will do what I can to make sure they get the best start in life. In addition to happiness, I want them to have a good education, find a career they enjoy and earn a wage they can live comfortably on.
What I’m not too keen on is them finishing their university degree with over £50,000-worth of debt. With two children under 11, that’s some time away – unless my daughter is a prodigy. She’d be taking after her mother, of course.
New research from the Institute for Fiscal Studies shows just how big this financial burden of university is for many graduates, so should parents – especially those who were lucky enough to study for free, like me – be looking to help their children pay off their student loans early?
It’s worth saying that I’m putting politics to one side. I’m here to look at how to improve your family’s finances, not pass political judgement.
Kids paying off student debt in their 50s
Three-quarters of graduates are unlikely to ever repay their loan in full, the IFS data shows, with many still paying off their student debt in their 50s. This means universities have limited incentive to provide high quality courses from the money they receive, which just isn’t good enough when many will be graduating with debts of over £57,000.
If your child started university before 1 September 2012, their repayments start when they’re earning £17,775 and their debt is written-off after 25 years – the government doesn’t expect it to be paid after.
If they began after the 2012 overhaul of tuition fees, they’ll be earning £21,000 before their repayments start and their loan is written-off after 30 years. The median starting salary for graduates in the UK is between £19-£22,000, according to Graduate Jobs.
But with so many graduates failing to repay their loans, the UK taxpayer’s forking out £5.9 billion a year on higher education.
Attractive interest rates used to be attached to student loans – the lower of retail price inflation (RPI) or the UK’s base rate plus 1%.
But this calculation switched to RPI plus 3% in 2012. As RPI hit 3.1% in March, the interest on student loans is set to increase to 6.1% in September. This will only increase debt levels further.
The IFS numbers show that the average student builds up £5,800 of interest while studying, increasing a £45,000 debt to £50,800 on the day of graduation. Replacing maintenance grants with loans means a student could finish a three-year degree with £57,000 of debt.
Should you pay off your child’s student debt?
It’s a question I often get from my friends; “Should I save to pay off my children’s student debt?”
The student loan is unlike any other loan you can find on the high street; you have to meet a threshold before you start repayments and the debt is written off after 25-30 years, without the need for you to declare bankruptcy.
It also doesn’t appear on your credit file and only appears on your mortgage application as an outgoing – just like pension payments.
If you do decide to repay early, you’re likely to face early exit fees to make up for the interest you’ll avoid paying. You also risk re-paying all of the loan, when your child might not enter a high-earning career – that’s money down the drain.
If you’re in the position to put some money away for your children’s future, you can use this to ensure they don’t take out less-generous and more unforgiving loans with a high-street bank during their studies.
With a record number of students going to university, your children won’t be alone with student loan debt behind them. You might prefer to put any savings for them towards their first deposit to help them on the housing ladder instead.