Why worry about your kids student debt?

[saladcruncher]

I finished uni in 2010, and became eligible to start my repayments from April 2011.

This was under plan 1 - the 'pay via tax method'

Plan 1 has a 25 year write off, so any remaining debt will be forgiven at the start of April 2037.

I'm already 13 years through this and in those 13 years, I've paid off I think up to 90 pounds. And I'm not going to be paying anymore anytime soon.

Basically it looks like I'll reach the write off period and have paid off 0% of my student debt - a free degree in effect.

I took out the full maintenance and tuition fee loans.

My question is, why are some parents trying to pay huge chunks of their childrens tuition fees or living costs in this situation, when the money could be put into a savings account for a house deposit etc in a few years time?

Granted a lot of people won't be earning under the threshold like I unfortunately have been and the write off is later but the principal is the same.

I just paid off the remainder of my Plan 1 yesterday! Been working for 9 years since degree and now that the interest has gone up so much it wasn’t worth not paying it off. Also, I need that extra few hundred coming out my salary for other investments/ pension now so it was a cash flow issue. It has led to a conversation with my husband that we don’t want our child starting working life with a huge student debt hanging over them affecting mortgages etc. So we are going to make a plan to help pay as much of it as we can, if they go to university that is. My graduate colleagues have between 40k - 80k in debt for a 3 or 4yr degree 😱and they will be paying it off for a long time - but paying way more interest over that lifetime.

Mine will never be paid off. I've never been able to earn enough to start the repayments.

We paid everything for three DCs the youngest was nearly 20k a year between tuition, accommodation and food. But he's free and clear.

Friends have two DCs medical students borrowing as much as they could parents wouldn't help out because dad is a socialist. Both intend to work abroad rather than the UK. The loan company will be paid because you are traceable.

Both DS have their tuition fees paid in full by the GP.
They've each got minimum maintenance loans and tbh, if we can afford (and it's likely), we will pay it off for them when they graduate. They don't know that yet though.
It seems pointless to have sufficient monies in the bank whilst interest racks up. And being male, it's more likely they will be paying.
House deposits we can also contribute to luckily.

@EweCee!

Congrats!!! I think they should send you a bottle of champers with a card when you pay it off 😄

Lol, thanks. I am delighted, feels like a real milestone.

I wish I got champers and card though - instead it took me an 1h20mins on hold just to get through to them to pay it off (you have to phone, can't do it online)!!! It's almost like they don't want you to pay it off... 🙄😁

The interest rate is now 7.6%. That’s huge. And rules might change and governments might ask for repayments sooner than expected. It’s a worry and I think people are sleep walking into it

I wish I could pay for DD.
The uni debt will influence the mortgage, car loan ect she can get in the future.

However the interest rate 7.6% is not what people pay as it is a strange loan. If you earn say £5k over the threshold you pay 9% of £5k which is £450 a year on a debt of say 50k which is about one per cent interest rate and it does not matter if the debt racks up if you never earn more than 5k over the threshold and it is eventually written off so lower earners eg because of how the 9% of pay works out might only pay 1% interest in practice therefore cheapest loan going for some or even a gift from hard working tax payers for those who never work a day in their life after graduating.

Tell that to the teachers, nurses etc whose salaries will never reach giddy heights.

Xenia do you know if you can overpay on a student loan?

I read an article that said that those who earn what experienced teachers currently earn will be worst hit by the Plan 5 loans. It will be them and not the highest earners or low earners.

This is because someone in a job, who a few years in earns something like £40- &50k currently will quickly exceed the minimum needed to start paying (£25k) and not pay such substantial amounts per month as to erode the debt quickly, so will keep paying it for almost the full 40 years but will pay it all off.

In that 40 years, they will pay at least 3x what they borrowed because if interest charges.

Alternatively, the very high earner will pay less overall. Although they will pay more early on, due to higher earnings, that 9% will be clearing bigger chunks so it will be paid off faster and with less years accruing interest. The very low earners, as we know will not pay it off.

There are far more graduates who earn around the £40-50k mark after a few years, than those on city salaries. For lots of them, these loans will be very costly over many years of their lives.

I think it’s not quite clear what to do with money if you’ve got some saved for children. (and I know it’s a luxury to have any to have to decide what to do with)

• Sometimes people say take the full loans for 3 years and don’t pay any off or take zero, because when you start working, the debt size doesn’t impact the amount you pay per month as it’s 9% of salary over £25k, not a % related to the size of debt. Yes, but if you have a smaller loan, although the early monthly payments will be the same, you’ll actually clear the debt faster and pay less overall and less interest, so that should be factored in and not simply the headline monthly rate affordability.
• People advocate saving the money for a house deposit and point out that the couple of hundred saved per month by the young adult worker by not having a student loan, won’t help them save a deposit very quickly, if their parents have used all the money for paying student costs. They point out that a young person who can buy a house quickly due to having deposit help quickly saves far more not having to make rental payments which aren’t paying off their own mortgage. Yes, but it’s also worth considering that many young adults are not ready to buy for several years. They want flexibility and renting suits them - and all that while if they had student loans, the interest would be rising.

Given these things I’m trying to decide what’s best to do with £60k we have for our DS. Before Plan 5, I thought the Martin Lewis advice to take the loans was best. I’d decided to take the loans and wait to see the career DS went for and then to probably help him buy a house and leave him to pay off his loans. Now I’m not so sure. At one point I thought we’d pay all the uni costs and let DS graduate debt free and avoid the loans and building interest. This still appeals because he is likely to inherit some money too which could be used for a house deposit - but of course you can’t ever rely on this definitely happening. Im not wondering about a half way house. We might pay everything for the first year and possibly the second year too, but take loans for 1 or 2 years. This way the debt is smaller, accumulates less interest before graduation and we still have £20k or £40k to give as a deposit.

Is this the best of bith worlds ir instead actually the worst of both worlds? In this situation, would you use the £60k to pay all the fees, pay just the parental top-up and give the rest as a house deposit, or go for a mix as mentioned above? Any thoughts and reasoning welcomed.

My feeling is DS will take a graduate job and earn good but not spectacular money. He might well be one of those who earns what a teacher would and would pay the debt for 40 years and be the hardest hit in terms of ultimately paying the most for that debt.

It’s not a waste if the interest rates stay the same or decrease because there would be less total debt to pay, but of course that makes no difference to your monthly repayments.

Like Martin Lewis says, it works more like a tax and it’s not smart to pay it off early.

Moneysavingexpert - Should I pay back my student loan early

@WombatChocolate

Thank you SO much for your insightful reply. I can now see the dilemma - and it really is a tricky one.

Out of interest what is it that you do. I thought with a stem degree you could learn above the threshold if it was what you wanted

My dd graduated last year and is already paying it off, all depends on circumstances. She's earning a graduate wage, plus bonuses

Wombat your post is spot on. That’s what I think. The mid earners around 40-45 will end up paying stacks in interest. Which is prob most of them really.

I think Martin Lewis’s advice is now slightly out with the % increases.

key is to take the loans as late as possible in the degree as wombat mentions

I believe ML says to now wait until they have finished the degree and then decide whether to pay back the loan depending on where the graduate is intending to work. They may have entered thinking they would be a missionary but decide that in fact consulting is for them, or vice versa. And yes, if you would have some interest to pay, but it would be quite small, if it seemed best to pay it off straight away.

This is only if you (or they) have this money sitting about spare. This really isn't a situation that most people are in and although the point has been made on this thread I think it should be emphasised that this is a massive privilege. Our DC will only qualify for the minimum loan (just over the threshold) but we don't have many thousands to spare. We have saved, but not £60,000 per child (nowhere near!).

I think you are right @WombatChocolate Plan 5 loans have moved the goalposts quite a bit. Decisions, for those in a position to have options, now have many more shades of grey.

and you are spot on in terms of the income group who will hear the brunt of the changes. The IFS have some interesting reports on that.

Future governments as @Newgirls points can legislate to move the goalposts further. I have a slightly different take on that. Grads with £9k / £9.25k tuition fees, and an outstanding loan of £40k plus will each year become an ever bigger part of the electorate. So long as they actually choose to vote it will become increasingly politically difficult to change terms for the worse. That of course is a glass well past half-full assessment.😀

I had an early loan and never paid a penny either. It wiped after 25 years. I had children young and only ever worked part-time after that. New loans have a lower threshold to start paying back and last for 40 years so current students will pay more, sooner and for longer.

Also the maintenance loans are now so far out of step with real living costs in the last two or three years, even if the child does get some loan there is a massive shortfall of £6-7-8k that either parents or the student (through a lot of hours of part time work) has to cover.

It’s a huge debt for our young adults to be stuck with. The payments running for 40 years and the higher interest rates pretty much mean they are paying a permanent additional tax . One which affects mortgage affordability, etc. If we were in the position to pay fees for a dc going to university, we absolutely would. Support with living costs will have to do though. At least when the debt was lower eg £3000 a year fees (or even no fees for certain courses) and the cost of living was lower , people were able to pay their student debt off over time. I think that’s important psychologically - knowing there is an end in sight. My student loan was paid off by aged 30, very few will achieve that now. It’s depressing. Student debt is one of the reasons I want my youngest dc to be absolutely certain that university is for him ( particularly if there’s an alternative apprenticeship route). I think most parents would help their dc avoid this debt, if in the financial position to do so.