For many UK parents, supporting their children financially is a natural inclination. However, it’s not always the best use of your savings when it comes to student loans. This article explains why.
Understanding the UK Student Loan System
UK student loans differ from traditional debts: repayments are based on income levels, not the total amount borrowed, and loans are eventually written off after a set period. So, depending on when your child graduated, their chosen career and likely progression, how much they repay and for how long will differ.
Here’s a breakdown of the current repayment plans:
Student Loan Repayment Plans for 2024/25
| Plan Type | Applicable To | Annual Repayment Threshold | Interest Rate | Loan Write-Off Period |
|---|---|---|---|---|
| Plan 1 | Students who started courses before 1 September 2012 (England, Wales, Northern Ireland) | £26,065 | 4.3% | 25 years after April, following graduation |
| Plan 2 | Students who started courses between 1 September 2012 and 31 July 2023 (England, Wales) | £28,470 | 4.3% to 7.3% (income-dependent) | 30 years after April, following graduation |
| Plan 4 | Scottish students who started courses before 1 September 1998 | £32,745 | 4.3% | 30 years after April, following graduation |
| Plan 5 | Students who started courses on or after 1 August 2023 (England) | £25,000 | 4.3% | 40 years after April, following graduation |
| Postgraduate Loan | Postgraduate Master’s and Doctoral students | £21,000 | 7.3% | 30 years after April, following graduation |
Note: Repayments are 9% of income over the threshold for Plans 1, 2, 4, and 5, and 6% for Postgraduate Loans. The interest rate is charged on the residual loan and does not affect the repayment calculation. The interest rate is based on RPI for the year to each March and applies from the following September to August payments. (gov.uk)
Impact Across Different Professions
Because your child’s chosen career and the year they took the loan out affect the repayment, some examples may help.
1. Secondary School Teacher (Plan 2)
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Starting Salary: £30,000
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Career Progression: Up to £45,000 over time
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Loan Amount: £45,000
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Repayment Outlook: With a starting salary just above the £28,470 threshold, annual repayments begin at approximately £137.70 (£30,000 – £28,470 = £1,530 * 9%). Given modest salary growth, it’s unlikely the full loan will be repaid before the 30-year write-off.
Parental Support Consideration: Early repayment may not be cost-effective. Supporting in other areas, such as contributing to a Lifetime ISA, mortgage or pension, could offer more tangible benefits.
2. Junior Doctor (Plan 2)
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Starting Salary: £32,000
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Career Progression: Up to £90,000+ as a consultant
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Loan Amount: £60,000
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Repayment Outlook: Initial annual repayments would be around £319.50 (£32,000 – £28,470 = £3,530 * 9%). With significant salary increases, the doctor is likely to repay the full loan, accruing substantial interest over time.
Parental Support Consideration: Early repayment will reduce interest costs and free up disposable income for other uses.
3. City Lawyer (Plan 5)
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Starting Salary: £60,000
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Career Progression: £100,000+ within a decade
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Loan Amount: £50,000
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Repayment Outlook: With a salary well above the £25,000 threshold, annual repayments start at £3,150 (£60,000 – £25,000 = £35,000 * 9%). The lawyer will likely repay the loan in full, incurring significant interest.
Parental Support Consideration: Early repayment will save on interest and free up disposable income for other uses.
IFS Study
2017 Research by the Institute for Fiscal Studies (IFS) indicated that approximately 83% of graduates with English student loans are projected not to repay their loans in full within the 30-year repayment period. This means that the majority of graduates will have a portion of their student debt, including accrued interest, written off at the end of the term.
However, in 2022, they analysed the future of student loans in the UK, focusing on the implications of the new Plan 5 repayment scheme introduced for students starting courses in England from August 2023. The IFS highlights that these changes will have varying impacts depending on graduate income levels. Lower-earning graduates are expected to repay more over their lifetimes compared to previous plans, due to the lower repayment threshold and extended repayment period. While higher-earning graduates may benefit from lower lifetime repayments, as the fixed interest rate eliminates the additional interest charges that previously applied based on income.
Overall, the IFS study suggests that while the new system aims to make repayments more predictable, it may increase the financial burden on lower earners and reduce the progressivity of the student loan system.
Opportunity Cost of Not Paying Off the Loan
Choosing to repay your child’s student loan early can free up income for other financial goals, for example:
1. Pension Contributions
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Employer Matching: Many employers match pension contributions, effectively doubling savings. Even if they don’t, more income being paid into a pension from payroll will get your child’s retirement planning off to a strong start.
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Tax Relief: Contributions benefit from a 20% government-funded supplement directly into the pension. For higher and top-rate taxpayers, additional tax relief reduces taxable income, offering immediate tax benefits.
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Compound Growth: Early and consistent contributions can significantly enhance retirement savings through the majesty of compound interest.
2. Lifetime ISAs (LISAs)
Lifetime ISAs are a tax-advantaged means for anyone under 40 to save for their first home and/or retirement.
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Government Bonus: A 25% bonus is provided by the government on contributions up to £4,000 each year.
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First-Time Home Purchase: Funds can be used towards buying a first home, accelerating property ownership. Otherwise, they can be used to fund retirement.
3. Emergency Savings
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Financial Cushion: Building an emergency fund provides security against unexpected expenses or periods out of work.
Emotional and Educational Considerations
Beyond financial implications, it’s essential to consider the personal development aspects which may influence your decision to pay off your son or daughter’s loan. For example:
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Financial Responsibility: Managing loan repayments can instil budgeting skills and financial discipline.
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Autonomy: Allowing graduates to handle their finances fosters independence and confidence.
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Parental Boundaries: Clear communication about financial support helps set expectations and maintain healthy relationships. There comes a time when every parent needs to decide to “set their child free”.
In summary, deciding whether to help with your child’s student loan repayment involves several important considerations. Their likely earnings over time and which plan type(s) your child has will influence how much of the loan they repay before it’s written off. So, understanding their career prospects is important; are they likely to progress quickly? Will they have a career change, perhaps when children come along?
It’s also worth thinking about how your financial support could be used more effectively; contributions to a pension or help towards buying a first home, for instance, may offer greater long-term value than reducing a student loan. Beyond the financial aspects, there’s also the opportunity for your child to build financial independence by managing their own repayments and learning to budget responsibly.
For the most current information on student loan repayment thresholds and interest rates, please refer to the official UK government website: Repaying your student loan: How much you repay.
Photo by Annie Spratt on Unsplash
