My 22-year-old son graduated university last July, has been working since January 2019 and recently received his loan statement through the post.
Between September 2015, when he started university, and April 2019, when he began making repayments, his student loan has swelled to around £40,000.
His starting salary means he is close to the tipping point when it comes to working out whether or not to pay off the loan up front, as he can expect to make around £50,000 worth of repayments over 30 years before the debt is wiped out.
Billionaire Robert F. Smith announced he was paying off the student loans of Morehouse College’s entire 2019 class, but should you pay off your child’s?
This could of course change if he salary continues to grow in the coming years and decades.
I’d quite like to help him save for a house and do something useful with the money. If I pay off the debt and he instead owes me the money not including the interest, what route could I potentially go down? – A.P.
George Nixon, This is Money, replies: Many graduates now resign themselves to the fact that they are unlikely to pay off their student loan before it is wiped out, especially given that the interest is three per cent plus retail price index level of inflation.
This is usually a much higher figure than the consumer price index measure of inflation.
It means many are discussing alternative ways of turning that student loan financial millstone around their necks into something useful.
This is Money’s sister title Money Mail ran through several options in May, including whether parents should pay off their child’s debt full stop, assume the role of a (slightly) benevolent loan shark, or, most pertinently to your question: help with buying a house.
Laura Suter, personal finance analyst at investment platform AJ Bell, also recommends investing any repayments if your child is paying you back rather than the Student Loans Company.
She said: ‘If you invest the money in a stocks and shares Isa it could grow to be a considerable savings pot for your child’s future.’
Assuming a student loan debt of £50,000, how much money would you save or incur by paying your debt off straightaway?
Seeing as you’re taking a slight hit on the total repayment by not charging an interest rate, investing the money could be a way to try and get a similar return, even if it isn’t as high as 6 per cent – the interest rate many recent graduates commonly incur on their loans.
However, there is a way to potentially help your child save for a house and combine that with an interest rate return if they’re saving over the long-term – a stocks and shares Lifetime Isa.
Allowing your son to channel the loan repayments to you into a Lifetime Isa in this way would allow him to benefit from the 25 per cent Government top-up bonus as well as the potential returns offered by investing.
The maximum you can save into a Lifetime Isa is £4,000 each tax year, meaning you could accrue £1,000 in free government money each year provided you open one before the age of 40.
You can use the Lifetime Isa to purchase a home worth up to £450,000 with a mortgage.
If your son paid in £4,000 a year for the next 10 years, then they would have saved £40,000 – around £1,600 more than the initial student loan – and received £10,000 in government top-ups.
An annualised 5 per cent return on that £4,000 a year investment would turn it into £51,700 after 10 years, according to This is Money’s own compound interest calculator.
This means by the time your son turned 32, he could potentially have a lump sum of £61,700 to go towards a house deposit.
According to estate agents Savills, the average first-time buyer deposit in the UK was £49,400 last year – but this could grow by the time 2029 comes around, depending on what happens to property prices.
Accumulating £61,700 could be used to buy a house worth just under £247,000, if you took out a 75 per cent loan-to-value mortgage.
How does the student loan system work?
If you’re considering paying off your child’s student loan debt, it’s worth first working out how much they would expect to pay over the 30 year repayment period before the debt is wiped
Loans to cover your university education are handed out by the government-backed Student Loans Company.
These come in two parts; tuition fees which are paid directly to your university and cover the fees of your course, and maintenance loans which are paid to you in three instalments each year.
Unless you are a Scottish student studying at a Scottish university, in which case you’ll pay nothing, the maximum tuition fee you can be, and often are, charged as a British student is £9,250 in the 2019-20 academic year.
Maintenance loans, meanwhile, are means tested depending on your household income.
Combined, these loans make up the outstanding student debt you will leave university with.
When it comes to repayments, at the moment you start paying back nine per cent of what you earn over £25,725, or £26,575 from April 2020, once you hit that earnings threshold.
It’s worth noting at this point that if you earned £30,000, you would pay back nine per cent of £4,275, not nine per cent of £30,000.
After 30 years, the loan is wiped out and many students may fail to clear it before this happens.
One of the big reasons for this is the interest rate charged on student loans, which begins from the moment they are taken out.
This interest rate, which has been in place since 2012, is at minimum the retail price index of inflation.
Those who earn between £25,725 and £46,305 will see the interest charged on their student loans increase by up to three per cent on top of the rate of RPI.
The interest rate rises 0.15 per cent with each additional £1,000 you earn. Above £46,305 your debts accrue RPI plus three per cent.
The RPI used is the figure from the previous March. In March 2018, RPI was 3.3 per cent, meaning the current maximum interest charged on those who left university that summer would be 6.3 per cent.
More controversially, that RPI plus three per cent figure is also added to the balances of those who take out student loans while they are still at university.
This is why many people’s student loans have grown substantially by the time they graduate.
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