Student loans: Some useful tips and advice for parents looking to help their children

If you have children, it’s likely you’ve considered the extent of financial support you should give them, especially as they get older and start to make their own way in the world.

One issue you may have to address is whether or not you should help them clear any outstanding student loan after they leave university. After all, it’s a potentially substantial debt burden hanging over them as they start work.

Government figures (1) show that £20 billion is paid out in new student loans each year, and the total value of outstanding loans at the end of March 2023 was more than £200 billion. According to figures published by the House of Commons Library (2), the forecast average debt for a student starting their course in 2022/23 is £45,600.   

You may well feel that such a debt is a hindrance to their future financial security, especially if you consider the well-publicised financial challenges your children are subsequently likely to face when they want to get on the housing ladder.

As with many financial issues, there is no clear answer to the question of whether you should help clear their student debt – it will depend entirely on both your and their circumstances. Read on to find out some handy facts and points that could help you decide what to do.

There are 2 different student loans

Although much of the focus and publicity around the issue of student debt has tended to revolve around tuition fees, there are actually two different loans that your children will potentially become liable to repay.  

1. Tuition fees

Loans for tuition fees can be up to a current maximum of £9,250 each year for full-time students.

They are paid directly to the university and will be the same amount for all students doing the same course, regardless of household income.

2. Maintenance loans

Maintenance loans are designed to help your children with their living costs at university and can be used to help cover costs for expenses such as food, course equipment, and accommodation.

Unlike tuition fees, maintenance loans are subject to eligibility and a means test.

The maximum loan in the 2023/24 educational year is £13,022 for students living away from their parents and studying in London.

The actual maintenance loan your child will be eligible for is based on three criteria:

1. Your overall household income
2. Whether your child is living away from home or with you
3. Where they are living – in or outside London.

In cases where a course lasts more than 30 weeks and 3 days, a “long course loan” may allow your child to get extra money as part of their maintenance loan.

Your child will only have to start repaying their student loan when their income reaches a certain amount

Your child will only start to repay their loans once their earnings exceed the “threshold level”.

Their appropriate threshold level, and the amount they will repay, will depend on the student loan plan type that applies to them (3).

The repayment rate is only applied to earnings above the annual threshold level. For example, if your child has completed a course based on Plan 5 and has annual earnings of £30,000, they will repay 9% of £5,000 – a total of £450, in that particular year.

It can help to see loan repayment as a graduate tax

Students loans are treated differently to standard loans that are repaid over a certain term.

Indeed, the fixed repayment rate of 9% of earnings above the threshold, and the fact their student loan is not registered on their credit history in the way that other borrowing is, would suggest that you might want to see it as a tax rather than a loan.

This is even more the case if you consider that – unlike normal loans – the outstanding balance is written off following a certain period after your child finishes university.

If you’re in a strong financial position, it’s understandable that you may be keen to help your children meet the cost of their university education, but this may not be the best way to provide support.

Your own finances may be a higher priority

It’s important to ensure that any help you give your child is not going to adversely affect your own finances.

We would strongly recommend you avoid assuming your child’s debt yourself. While this could be well-intentioned, you may end up creating financial problems for yourself in the future.

To ensure you properly prioritise your own financial situation, you should make sure that you: 

• Have an easily accessible emergency fund
• Repay your own outstanding debts first
• Can afford to fund your retirement.

Remember: your child will only pay this debt if they can afford it.

There may be better ways to give your children financial support

Even if you are confident that you have the means to clear your child’s student loans without negatively affecting your own financial future, there may be better ways to offer support.

For example, they may have accrued other debts while at university, such as credit cards or personal loans, which are likely to be more expensive and highly unlikely to be written off in the future.

You might also want to consider giving them money towards a deposit to help get a foot on the housing ladder. An effective and tax-efficient way to do this is through a Lifetime ISA. You can contribute up to £4,000 each year, to which the government adds a further 25%.

Finally, your child’s other financial commitments may mean they aren’t saving enough into a pension, so you may want to consider boosting that for them.

Any contribution you make will be treated as though it had been paid by them, and they will benefit from tax relief at their marginal rate.

Be aware, however, that pension contributions should be seen as a long-term way of supporting your children financially, as they are unable to access their pension fund until they reach a certain age. Currently it’s possible to access a private pension at age 55, but this is rising to 57 in 2028. It’s not inconceivable that this will be altered again before your child starts to think about retiring.

The benefit of planning ahead

If you don’t yet have children, or they are currently below university age, the issues of student loans and financial support once they grow up are worth thinking about and planning for.

You may want to consider setting money aside on a regular basis. Doing this when your child is born gives you almost 20 years to save and invest for their future.

Get in touch

If you’d like to talk to us about student loans and how you can help your children financially, please get in touch. Email info@lebc-aspira.com or call us on 01454 632495.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation to any investment or retirement strategy. You should seek independent financial advice before embarking on any course of action.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA. The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

(1) commonslibrary.parliament.uk/research-briefings/sn01079/#:~:text=Scale%20of%20student%20loans%20in%20England&text=The%20forecast%20average%20debt%20among,when%20they%20complete%20their%20course.

(2) commonslibrary.parliament.uk/research-briefings/sn01079/

(3) www.gov.uk/repaying-your-student-loan/what-you-pay