Plan 2 Student Loans- much higher interest, Times article - parents pay off

[fluffythecat1]

Our son is potentially heading to university in a few years. I follow Martin Lewis for his excellent financial guidance and have been concerned about his advice on student loans. Before, it was advisable to get a loan and in likelihood not pay off the full amount under the old system, now it seems the interest on them has changed as discussed in this Times article from yesterday, meaning that even with a good job, there is a significant long-term burden for graduates.
What are people’s thought? Gap year to earn some money before going? Put any money in a child trust fund towards it? Reducing the amount of loan taken looks key.

I had £21k student debt — why did my twin owe £40,000 more?

https://www.thetimes.com/article/8598d6cf-cb9e-4e78-9a51-7b1023ce53a6?shareToken=e66982418968f371f402de3a5c210f99

There is nothing simple in supply and demand. Using “simple supply and demand,” you might have nobody willing to pay for experimental research - it takes far greater foresight than “simple supply and demand” to decide who and what to take a risk on.

As for CEOs of publicly listed companies - plenty of truly awful, massively well remunerated examples of those. The world is positively oozing with people who claim to be amazing and are even accumulating wealth on it, but are actually just abusing power, privilege and influence - or has Epstein passed you by? Or Trump? Pay is often more closely related to how much you can get away with insisting on than a well functioning, transparent market of supply and demand (which only actually works in a very simplistic, small scale economy involving only what people need to survive, not extending to far more complex societies). Pretending it’s all “simple supply and demand,” gets us social influencers, denial of climate change, voting for Tump, and phone addictions, because there is plenty of demand for time wasting inanity and climate change denial, and much less for grappling with complex problems. 😉

My son ‘may’ be starting university in a couple of years, (he will likely also be applying for apprenticeships at the same time). I am still foxed over whether he should apply for a full student loan or whether we should put some money his way so that he doesn’t have to borrow so much.

@fluffythecat1 Read MSE. It doesn’t matter one bit what the size of the loan is! What he will pay is based on his salary - not the size of loan. So if he earns £40,000 he pays the same for £20,000 borrowed as £50,000 borrowed. The difference will be how quickly it’s paid off and interest accrued will get higher, but repayments are still based on salary. If he’s scraping a living - he pays £0. How good is your crystal ball?

If you have, in savings, £60,000 for him, you need to take a view on what’s best to do with it. House deposit or pay for him at uni. You will have to pay something for uni anyway if he’s in minimum loan. If he’s going to be paying his “tax” for 40 years, and pay well over the loan, it might save him a lot by paying up front. But: the house will presumably have to wait. Do you want that? What does he want?

If you have circa £120,000 - happy days - do both.

I don't think this is true at all. There's a over supply of people wanting to do every job. Any job!

If it were true that pay could be set lower because of a higher demand in people wanting to do that job, then lawyers would not be paid higher than librarians or teachers.

Lawyers have just been more successful in protecting their profession because their salary doesn't come from the state.

I haven’t followed this closely but the Times campaign on this is being covered in the radio. It makes sense.

I was/am very worried about this for my children. The talk of 9% seems massive when 9% on a 40k salary works out around £300 a month. Seems massive when you factor in the deductions you already have. Pension, tax, ni. But just today I thought let me run it it through salary calculator to see what it actually is. I compared it on my salary as I still pay plan 1 student loan at 43! It actually turns out plan 2 pays less a month than me! By about £20. Obviously when panicking about 9% I didnt factor in the fact that it only counts salary above a certain amount. So it's not 9% on whole salary.

Before this revelation I was talking to my husband about seeing if we could afford to take out personal loans to pay for children to go to uni and they pay us back when the time comes. All the stories of graduates interest going up and up and not even close to paying down the original loan amount was very stressful. Who wants that for their kids. Especially seeing that graduates are struggling to even get jobs these days also.

I am still unsure. My loan is getting close to paid off. My original student loan of 10k is paid off but my post-grad teaching one where I added an extra 10k I am still working on. (No longer a teacher so that sucks!). I have about £4k left to pay. I should hopefully manage that before 50 ish. It's only around £100 it takes out my wage so not massive, but at least I can pay it off by 50. Possibly earlier if I feel like dedicating myself to clear it above other things I am saving for etc. but my kids won't be clearing any uni debt until it's wiped off probably. It probably will just be a graduate tax. Also, what if the terms change after they have taken out loans? All things to consider. But as it stands, life is already expensive without trying to factor in paying for kids to go to uni as well. Already planned to save for them to help out while their at uni, couldn't stretch to covering fees and loan costs also. A lot is put on parents these days. My mum paid my £1k a year tuition fees and refused to help any further. It's a whole new story these days with parents being expected to support their kids now well beyond 18.

Many other countries fund Higher Education through general taxation.

The UK has chosen to keep general taxation rates low but tax graduates an extra 9%

Sending more and more kids to university was a nice way to massage the unemployment figures
but now hard choices are needed.

There are far too many degrees that do not add value to the individual relative to the cost to the taxpayer
Day release degrees, HNDs and proper respect for things like City & Guilds must return.

I'm an accountant and financial adviser and student loans really irk me!

Back in the 80s, I didn't need one as the government paid for my education.

I've experience of the Plan 2 (DC1) and Plan 5 (DC 2 and DC 3).

DC1 did a 4 year course and graduated last summer with a £56k loan. It was just going to escalate for next few years so I paid it off. Like others born in 2001/2, this poor DC got no Child Trust Fund (born a few months too early), had a covid disrupted final year at school, and was stung with the punitive RPI +3 interest rate. AND his lecturers were repeatedly striking - so he had a disrupted university education too (What was more annoying is the lecturers didn't warn students they were striking, so they'd turn up for lectures only to have no lecturer.... so it was a waste of their time AND money!). It's lucky they all walked straight into jobs on graduating....... NOT!

All the while Martin Lewis was harping on that parents shouldn't pay down their kids student loans as very few students ever pay them off. What he never mentioned was the interest they had to service over the course of their careers. He's done a U turn now.

@MidLifeCrisis007
If the loan is £10,000 or £100,000 the deductions from salary are identical.
(9% of earnings over the threshold)

If therefore makes no sense to pay off part of it.
Only to pay off the whole thing or to leave it running.

Its notable that Martin Lewis rarely aims his advice at the families of young folk who might be stung by future inheritance tax (the numbers of whom will at least double following the recent announcement about unspent pension pots).

Any money gifted by grandparents and older parents for university fees will be free of inheritance tax. I don't know whether paying off student loans after the fact will be similarly IHT free but, as a financial adviser, perhaps you do know?

... fwiw, ChatGPT thinks that funds gifted to pay off a student loan would not be IHT-free, but funds gifted to pay fees up front would be IHT free.

Chat GPT is incorrect.

@startingup Gifts - live for 7 years after you gift. That’s all you need to do to avoid IHT on the gift. No reason for the gift is required so straightforward. Also easy to find out via reputable sources.

When ML wrote about not paying off loans, that’s correct info for the majority who took them out. They are not paid off and we are borrowing to keep the universities afloat. If you don’t earn much, the previous loans still don’t require much per month. The big hit is with the 40 year loans. More paid because of the longer period.

The biggest problem is the fact it’s a debt hanging around your neck for 30-40 years and the Government has demonstrated that it moves the goalposts when it wants to, so there’s no certainty. The Plan 2 loans have an unfairly high interest rate attached, particularly given this era of high inflation, so many people are finding the money they owe continuing to increase rapidly, even whilst they are making “repayments.” If you have a student loan hanging round your neck, you are at the mercy of political expediency - like “benefit scroungers” and anyone else it suits politicians to blame for the country’s problems, you’re ripe and ready to be picked on for someone else’s political gain. Why put yourself at the mercy of untrustworthy politicians and their whims for 30-40 years when you don’t have to?

But the loans do not count as borrowing for taking out a mortgage.

They count as a 9% drop in income.

The terms of each loan are fixed from the day they are taken out.
Future politicians cannot change past loans.

@Walkaround But most better earners have degrees and dc cannot find suitable apprenticeships at 18. So what should they do? Jobs are on short supply. The loan in question is 30 years. Most were not expected to pay it off so the government is extracting more out of them. No one pays it off if they do not earn much. I agree that that government changing the rules is poor but they do it for everything else. They also do
it for VAT, stamp duty and NI in case you had not noticed.

I'm fully aware that gifts are exempt from IHT after 7 years - I'm talking about people who are uncertain whether they will live for 7 years, such as grandparents or elderly parents.

You may not be so dismissive when you get to that stage of life yourself. 🙂

Please elaborate?

There is no special exemption for grandparents to fund education.

Parents funding education is exempt from IHT
but grandparents and other family members have to do it out of regular income or within the £3000 annual limit

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04176

My son (who did a degree apprenticeship) had to complete UCAS information as part of his BTEC unit! I can't remember now if he managed to argue a different approach because he had no intention of doing a degree the traditional way but I remember commenting that the unit didn't involve assessing the future cost in any way at all which seemed a missed opportunity.

@Talkinpeace You can give money to whomever you want to reduce your estate for IHT purposes. Grandparents or anyone else. You give, make sure it’s noted, and live for 7 years. The £3000 rule is a tax exemption for each tax year and not the 7 year rule where you can give away whatever you don’t need - but you must live for 7 years. It’s often used for house deposits and much larger sums of money.

I know.

The late Duke of Westminster gave his daughter a farm when she married Dan Snow.

My point is that IHT is irrelevant for student loans unless the parents can do it
or the grandparents are relatively young

Martin Lewis’s has never got it right on student loans in my view. That’s why my kids have never taken them. His blithe attitude that “it’s just a grad tax” - well if I had to pay 9% extra tax for the rest of my working life I would be furious. And he knew that the govt could retrospectively change the terms because they did it once before, in 2008 iirc. Why he downplayed it like he did, saying that even parents who could afford to pay the fees shouldn’t do it, is beyond me. Financially illiterate.

What loan terms were changed retrospectively in 2008 ?

Agree with this