As school leavers jumped for joy at their A-Level results last week, parents may have had cause to grimace. Despite the government’s emphasis on apprenticeships, a university degree remains a passport to higher paid employment.
Nevertheless, the costs of higher education have spiralled in recent years, and students are having to take on much larger student loans.
In 2012, tuition fees tripled to £9,000 a year, and a number of universities are considering increasing this to £9,250 in 2017, as the government allows the cap to increase in line with inflation.
The cost of living can be even greater, especially in London where rents are higher and public transport is essential. Gocompare’s recent Degree of Value rankings put the cost of studying at the University of Westminster for a year at £24,668, marginally less than the average UK salary – £26,500. The LSE and UCL are not far behind, setting students back £24,491 and £23,488 a year respectively.
If the principal has ballooned, the real sting lies in the rate of interest. This has just been raised, and begins accruing at the start of a student’s first term. All in, this September’s freshers face student loan interest of 4.6 per cent a year. This is calculated at March’s retail prices index (RPI) – currently 1.6 per cent – plus three points, which is applied from the time they start their course to the April after they graduate.
From that date onwards, the interest rate adjusts with RPI, and is linked to their income. If a recent graduate is earning less than £21,000 a year, then no repayments are due and interest accrues at the March RPI figure only – currently 1.6 per cent. For those on £21–41,000, the interest rate rises with earnings, with those on £41,000 paying March RPI plus three points (4.6 per cent). The government will index-link interest at this threshold until 2022.
To put this into perspective, incoming freshers would have to earn more than £50,000 a year before they start to pay off any of the capital, according to Justin Modray, director at Candid Financial Advice. And if inflation is stoked as a consequence of Brexit, student loan interest will grow with it.
For many, the debt pile will simply be insurmountable.
A graduate tax
It may sound anathema to many parents brought up with the inviolable principle of living within their means, but paying off student debt for your children seldom makes good financial sense, even when borrowing costs are so low on other forms of debt.
This is because student debt is very different to other forms of debt. Unlike credit card or mortgage debt parents may take on themselves to shoulder some of the burden, student debt will not affect your children’s credit history, and their assets will never be under threat of repossession.
Current legislation ensures that anything left outstanding after 30 years is cleared automatically, and graduates only start repaying when they earn £21,000 or more, paying interest and possibly the principle at 9 per cent of their gross income.
The Institute of Fiscal Studies reckons that 69 per cent of students who graduated last year will have at least some of their debt written off.
The problem is that few parents are in a position to approximate what they’re child will be earning after they leave university. For the parents of children who don’t go on to become high fliers, helping them probably isn’t worth it – it would be extremely unwise to make yourself liable for a debt your child is unlikely to have to repay in full.
Instead, parents and students should start to look at student debt as a kind of graduate tax, rather than a source of shame or worry. “A sensible compromise would be to do what you can to help your children, without bending over backwards,” says Modray, and parents with higher incomes will have to help towards maintenance at university in any case. Here are some things you can do.
Help with maintenance
If your child is a number of years away from flying the nest, you could put money into a savings bond. Clydesdale Bank and Yorkshire Bank are currently paying 2.2 per cent on a five-year bond of at least £2,000. This interest rate is guaranteed, but you could earn more on annual sums of up to £4,080 by taking out a Junior Isa (Jisa) and investing in riskier assets over a longer period.
Jisas don’t eat into your own Isa allowance, and your children can’t access the pot until their eighteenth birthday. Of course, there’s little stopping them from blowing it all on a trip to South East Asia once they come of age. But herein lies the upside; Jisa savings can be used for anything and they are automatically converted into adult Isas when your child becomes one. So if they decide to take out all or part of a student loan, they could use the Jisa savings for a deposit on a first home further down the line. “Mortgage debt always has to be repaid so paying towards a house purchase upfront always makes sense,” said Stevenson.
Read more: Time matters: Why kids can be risk-takers
“If you haven’t set aside a nest egg by the time your child heads to university, but have some spare income, you could let your child take on the £9,000 tuition loan and reduce the size of their maintenance loan by helping them out with living expenses,” says Modray. “Of course, by giving money to your children, you also move it outside of your estate. So if you live for at least seven years afterwards, you pay no inheritance tax on that sum.”
Refinancing is a risky option, but mortgage lenders have been slashing interest rates since Brexit and the Bank of England’s decision to loosen monetary policy even further.
If you’re currently locked into a mortgage, you could contact your lender to get the extra debt added, or look at the cheap two or five-year fixed rate deals on the market. “There are two-year fixed rate deals at just over 1 per cent interest, and five-year deals at 2 per cent interest,” says Trinity Financial’s Aaron Strutt.
“Normally it’s over school fees that parents come to us for refinancing. Looking at the Student Loans Company website and the [interest rate] update from a couple of weeks ago, this might be the next thing we get contacted about.”