Navigating the maze of student loans: A tale about debt and conundrums

Welcome, fellow scholars, (and of course the parents and grandparents of…) to the grand adventure that is higher education!

If you decide University is the right option for you, (and that’s a key decision) I’m a firm believer that the course is more important than the University you choose. One of the key benefits is personal growth, which comes from immersing yourself into the university experience and the opportunities available.

I graduated 3 years ago, and I can tell you University is an exciting journey, but it is also embellished with many decisions that need to be made before you can set sail. You might choose to stay in student halls or commute to campus. If you love cooking, you might prefer to have a fully equipped kitchen, but if beans on toast is as far as your culinary skills go, you might prefer ‘catered’ halls.

The list, of course, doesn’t end there, but as financial planners, the decision we’re often asked to help with is whether taking out a student loan is the smartest option or if a generous gift from parents/grandparents is better. Our advice in this area has changed over the years, as the goalposts are regularly repositioned.

The terms of the student loan changed for those starting from September 2023. The salary threshold for making loan repayments has been reduced from £27,295 to £25,000 per annum and the length of the term has been increased from 30 years to 40.

So, on the face of it, your salary threshold for repaying has moved down, though the timescale to repay has been extended to 40 years. That takes you near to state retirement age before some might have repaid their debt which is a scary thought. To put things into perspective, someone earning £50,000 pa will make repayments of about £188 per month.

Presently only 23% of loans are actually repaid in full. The government statisticians believe this change will increase the number to 53%.

Technically, the  only “improvement” we can see is that the interest rate applied is now capped at RPI, meaning that in real terms, there is no cost (Martin Lewis explains this really well here https://www.moneysavingexpert.com/students/student-loans-england-plan-5/#interest).

So, does this tip the balance towards funding the cost of university from cash? Whilst it may seem that way, the answer is not that straightforward. Even with the recent changes, the student loan remains the best type of borrowing available. Why?  Well, it doesn’t affect your credit score, if you’re not earning enough or stop working you don’t have to make any repayments and after 40 years, it’s all forgiven. Pretty generous terms!

As parents/grandparents, it’s sensible to have a financial plan in place not least to ensure you can comfortably meet your own income requirements throughout your life before committing to funding education costs, which of course, has ‘gifting’ implications potentially leading to tax liabilities down the line (Inheritance tax I’m looking at you!). Even if your financial health is in tip top shape gifting cash needs to be timed correctly to be effective.

So, in my view, if a student is fortunate enough to have the choice to consider a gift, I advise them to look further down their planning line. Whether it is right to take the loan now, and use the gift later is a thought process worth exploring. As I have outlined, the loan terms are generous comparative to any other available, and therefore, consideration should be given to life after university, not just the period during.  The future “needs” for which the currently-student-soon-to-be-fully-fledged-adult will grow, and as we all know, getting a loan is now much more expensive than it was just a few years ago, and the cost of getting on the housing ladder is increasingly prohibitive to many.

As you weigh up the options and consider the best financial path for you or your family’s higher education journey, remember, we are always here to help.