How to avoid student debt DISASTER
JUST a few decades ago in the Sixties and Seventies, the lucky one in ten school leavers who went to university received a free education that typically set them on course for a stellar career.
For today’s teenagers and their families, the reality is a tad more expensive.
Around 320,000 18-year-olds have applied to go to university in the UK this year — one in three. According to the Institute for Fiscal Studies think tank, they’re set to graduate with enormous debts, averaging £50,800, and no certainty that they’ll find a decent job.
Families want to encourage teenagers to achieve their potential, but many are horrified by the thought of their offspring still in debt into their 50s.
So is there a way parents or grandparents can help without breaking the bank?
Here, we guide you through the student loans maze.
HOW DO STUDENT LOANS WORK?
THe Student Loans Company offers loans of up to £20,252 a year to cover tuition fees and living costs.
From September, the maximum loan is £9,250 a year for tuition fees and £11,002 a year for living costs. How much students are awarded in a maintenance loan depends on parents’ earnings.
Unlike conventional loans, the amount students repay each month after graduation is linked to their earnings.
Once on a wage over £21,000, payments of 9 pc of any income over this threshold is due. So someone earning £ 22,000 will repay £7 a month and someone on £30,000 will repay £67 a month.
The monthly payments are taken automatically from your salary by your employer. It means you cannot miss a payment, and the debt won’t lead to debt collectors, a poor credit rating or losing your home.
Martin Lewis, of MoneySavingexpert. com, says: ‘ A student loan is the ‘best’ form of debt. The interest is relatively low and, crucially, you only need to repay it if you earn enough.’
Any outstanding debt is wiped by the Government after 30 years. This means that if your child is a low earner their entire career, they will never need to pay back a large part of their student loan.
WHAT ARE THE DOWNSIDES?
YOU face paying thousands of pounds of interest on your loan.
If you started university before 2012, rates on loans were just 1.25 pc. But if you started after then, you will pay a lot more.
Students beginning this September will pay anything between 3.1 pc and 6.1pc, depending on their salary after graduation.
A study by the Institute for Fiscal Studies found the average student has accrued £5,800 of interest by the time they leave university. So if they borrow £45,000, this debt will have grown to £50,800 by the time they graduate.
Universities Minister Jo Johnson admitted the system is ‘under review’ following a backlash against high rates.
COULD YOU HELP WITH SAVINGS?
IT dependS on your own financial situation and how much you think your child will earn after graduating. If your child remains a low earner all their working life, they will only ever repay a small chunk of their loan before the debt is wiped after 30 years. So parents could find themselves paying for fees the child would never have needed to repay.
It is difficult to predict when your child is 18 whether they will be a high earner in the future.
A rough guide is that if your child racked up £50,000 of debt at university and started their first job on the average national salary of £27,000, they would repay only roughly £30,000 (excluding inflation) before their debt was wiped three decades later.
So if a parent had paid the student loan of £ 50,000, they would have paid £20,000 unnecessarily. This is based on Money-
savingexpert’s Student Finance Calculator and assumes they receive 2 pc annual pay rises.
However, if your child’s starting salary was £32,500, they will repay their initial debt of £ 50,000 (excluding inflation) before the 30 years is up.
So if their first wage when they graduate is likely to be higher than this, and they will have to repay a large proportion of their debt, it might be worthwhile trying to pay their fees.
In practice, it’s almost impossible to predict how earnings will change over a career.
Martin Lewis, of Moneysavingexpert, says: ‘Many parents are keen to start university funds to help stop kids building huge debts. But many students won’t need to repay anything close to the cost of their tuition fees. If that’s the case, paying upfront is a waste.’
However, Danny Cox, of Hargreaves Lansdown, says: ‘I don’t like the principle that children leave university with a huge debt, regardless of whether they will repay the full amount in the future. The monthly student loan payments can also impact on the size of mortgage they can take out when they buy a home.’
SHOULD PARENTS BORROW CASH?
IF you don’t have savings, you may consider borrowing money via a personal loan or by extending your mortgage to help your child. Parents may be able to get loans at lower interest rates than student loans.
Mr Lewis describes the idea of parents borrowing money to help their children avoid student debt as a ‘nightmare scenario’: you could end up repaying debts your child doesn’t have to.
Taking on debt in your 50s and 60s on behalf of a child — whether they pay you back or not — is also no small undertaking.
But with interest rates at rockbottom, it is tempting. The cheapest personal loan on the market is 2.8 pc with M&S Bank and TSB — much cheaper than the maximum 6.1 pc which students face.
Some parents are also making the most of low interest rates by extending their home loan to fund their child’s education. Calculations for Money Mail suggest it could be up to £83,000 cheaper to remortgage than let your child take out a student loan.
If you borrowed £44,000, for example, with First Direct’s top ten-year fix at 2.49 pc, you would repay £49,800 over a decade. over 25 years, it would be £59,100, according to broker L&C Mortgages.
By comparison, if a graduate on a starting salary of £30,000 borrowed £44,000 through The Student Loans Company, they could repay a total of £70,590 over 30 years — at least £10,000 more. And a graduate on a starting salary of £41,000 who had borrowed £44,000 could face repaying £133,000 at most over nearly 30 years.
Andrew Montlake, of mortgage brokers Coreco, says: ‘ Adding to the mortgage is attractive in such a low interest rate environment for parents looking to borrow. But while your child’s student loan is linked to their income, your mortgage repayments are not and must be repaid whatever.’
IS A COLLEGE FUND A GOOD IDEA?
In THe u.S., parents are used to starting a college fund when a child is young.
It might seem presumptuous to save for your child’s university education while they’re still in nappies. But if you can, you will benefit from the power of compound interest over 18 years. For example, if you save £200 a month from the day your child is born until they are 18, at a return of 5 pc, your £43,200 investment would be worth £69,840. If you delay until their ninth birthday and then save a larger amount of £ 500 a month — £54,000 by the time they’re 18 — you will have still made less money at £68,021 because the interest hasn’t had as long to compound. one of the best ways to save is a Junior Isa, as you can invest up to £4,128 a year taxfree. When your child reaches 18, this cash will be moved into an adult Isa. Some of the interest rates on cash Isas are fairly reasonable — Coventry Building Society offers the best at 3.25 pc. But if you don’t mind taking a risk, you might build much higher returns on a stocks and shares Isa. Parents who want to retain control of the cash may prefer to save the money in their own Isa.
CAN I PAY OFF EXISTING LOAN?
THere are no restrictions on how soon graduates can pay off their student loan. But look at whether paying off a lump sum will lower the amount you pay overall.
Mr Cox says: ‘Those who think there is even a reasonable prospect that they will repay their student loan should pay it off as soon as possible, since the interest rate charged is horrendous and the quicker they pay off the better.’
Many parents and grandparents see paying education fees as part of inheritance tax planning. But beware of tax liabilities.
you can gift £3,000 a year in total to children or grandchildren and it will not be considered part of your estate when you die.
If you give away larger sums and then die within seven years, inheritance tax at 40 pc may be owed.
But there is a little- known loophole. Jonathan McColgan, of Combined Financial Strategies, says: ‘If you make regular gifts from your excess income, there is no inheritance tax to pay.
‘you just have to be able to show the taxman that your income for that year exceeds the payments you have made.’
If your child is struggling with living expenses after they finish university, they could also take out a graduate loan. These sometimes offer more flexibility than traditional personal loans.
TSB’s graduate loan includes no repayments for the first three months plus the option to take two ‘payment holidays’ a year.
However, the interest rates vary significantly between lenders.
According to data provider Moneyfacts, Lloyds offers personal loans on £ 10,000 from 3.6 pc interest, but this rises to at least 11.9 pc for graduate loans. HSBC offers interest rates from 3.3 pc for both its personal loans and its graduate loans.
David Smith, of Tilney Bestinvest, says: ‘Deciding how best to help your child finance university is often a personal rather than a purely financial decision. There is no “one size fits all” answer.’
Should parents borrow to pay off loans or let children go £50k into the red? Our guide explains all