Student loans best left alone

Why you shouldn’t rush to pay off education fees… A new repayment plan for student loans is being introduced in August.

One of the biggest changes seen in the scheme – known as Plan 5 – will be that students start repaying their loan when they earn over £25,000 per year.

Currently, the threshold stands at £27,295 per year.

Another change is that the interest rate charged will be linked to the Retail Prices Index (RPI) so the rate will rise and fall in line with inflation.

This is likely to mean that the interest rate on student loans will be lower than it is at the moment.

Finally, the new system will also have a longer repayment period – students will now have 40 years to repay their loan instead of 30 years.

Many parents want to help fund a university education for their children but, with prices at £9,250 per year before you’ve even bought a textbook, Pot Noodle or secured any accommodation, that cost is far from trivial.

As a rule, I believe you should organise your present finances first – such as banking, debt repayment and insurances. Then you should think about covering your future finances, such as your retirement plans.

Only when both of these are done should you consider others. It’s the ‘Now, then, them’ principle.

In economics, the concept of ‘opportunity cost’ considers all the things you miss out on when you commit your resources to something.

In other words, if your options are A or B and you choose B, the opportunity cost is A.

In my view, as a financial planner, the opportunity cost of clearing someone’s student loan is almost always going to exceed the benefit.

Even if your current finances and retirement plans are on track and you have surplus money available, you

‘‘ Paying fees might mean less capacity to help kids with deposit for first home

would be better off setting money aside to help your children with future expenditure – such as a house purchase – than to pay for their education fees.

If you do rush to pay off a student loan, it might also mean less capacity to help towards the deposit for a first home – and possibly more time living at home or in rented accommodation while trying to save for a deposit.

Another opportunity cost might be a new car when your child starts work, meaning they opt for a finance deal also on terms far less favourable than the student loan. A more topical opportunity cost might be helping fund childcare for any grandchildren.

This average cost for this is more than £1,000 a month per child so this eye-watering expense is likely to dwarf almost anyone’s monthly student loan repayment.

If you are keen to support your children financially, helping with their accommodation and living costs may be a better option.

And ultimately, helping them with a house purchase, using a Lifetime ISA, will be more appropriate.

The deadline to apply for student finance for the 2023-24 academic year is May 19 for new students and June 23 for returning students.