Gifting to children or grandchildren to repay their student loan. Good idea or bad?
There is increasing analysis and coverage of the current Student loan system, highlighting how students can be repaying diverging amounts over time.
We’re not going to stray into the politics of recent changes to repayment terms or the whole principal of tuition fees, rather a look at whether parents and grandparents should be considering the repayment of a student loan (focussing on Plan 2 loans) as one of the most effective ways to financially help individuals.
What are Plan 2 student loans and how do they work?
Plan 2 student loans were issued to English undergraduate students who started courses between 2012/13 (when fees first increased to £9,000 a year) and 2022/23.1 Students were able to borrow to cover their tuition fees, and also for their living costs while at university.
The repayment terms are as follows:
- From the April after they graduate, borrowers make loan repayments of 9% of their income above a repayment threshold, which is currently £28,470.
- Interest is typically added to an individual’s balance at the rate of inflation measured by the Retail Prices Index plus 3% (‘RPI+3%’) while studying, and then at a rate between RPI inflation and RPI+3% depending on their income each year. Interest is added at the rate of RPI for those with income up to £28,470, at RPI+3% for those with income above £51,245, and at a variable rate in between.
- Any outstanding loan balance is written off after 30 years with no adverse consequences for graduates.
For a comprehensive guide to Plan 2 loans see Martin Lewis – Plan 2 Student Loans
Current Plan 5 loans (for English students starting courses on or after August 1, 2023) differ from Plan 2 loans as follows.
- Lower Threshold: The repayment threshold for Plan 5 is lower (£25,000 as of 2023/24, to be adjusted annually from April 2027), meaning borrowers start paying back sooner.
- Longer Term: Loans are written off after 40 years, rather than the 30 years under Plan 2.
- Lower Interest: The interest rate is set at RPI (inflation) only, whereas Plan 2 can charge up to RPI + 3%.
- Higher Repayments: While interest rates are lower, the lower threshold and longer term mean more graduates are expected to repay in full.
For a comprehensive guide to Plan 5 loans see Martin Lewis – Plan 5 Student Loans
Why might you consider repaying a student loan?
Principally because as the Institute of Fiscal studies (IFS) identifies “many borrowers will see their outstanding loan balance increasing year on year in cash terms, despite them making monthly loan repayments. This will depend on their income – which determines how much they repay and the interest rate they face – and their outstanding loan balance.
For instance, someone with an outstanding loan of £50,000 would need to earn around £63,000 (and repay £3,100 per year, or £260 each month) to see their loan balance stay the same – and would need to earn more than this to see it start to come down (figures as at February 2026).
With outstanding Student loans potentially reducing the mortgage affordability and accessibility for individuals, this had led to stories of personal loans being taken out to repay part or all of any outstanding student loan or a larger mortgage being obtained to repay student loans.
It is very difficult to provide definitive guidance as to who should or shouldn’t look to repay their student loan if they were gifted funds.
There are a number of factors which can strongly influence any decision such as.
- Which loan plan (Plan 2 or Plan 5) is in play
- Anticipated future earnings
- Career and work expectations
- If funds may be required elsewhere e.g. house deposits etc..
- Repayment of higher interest debts
- Pension contributions (particularly with higher rate tax relief and/or employer matching contributions)
Other key considerations
- If the student loan is unlikely to be repaid in full before it is “written off”, repayment may not make sense
- If the individual is a higher earner and will likely repay the student loan in full, then repayment could reduce interest repayments and shorten the duration of any loan
- If the loan holder has emergency savings, good pension provision and no other debts, then clearing the loan provides a return equivalent to the student loan’s interest.
- Care should be exercised if the student loan holder may stop working, could move abroad with uncertain earnings, may take career breaks or their earnings may drop
Conclusion
Inevitably, given the complex nature of student loans, best advice is going to be very much determined on an individual basis, but we strongly recommend that if funds are to be gifted and the recipient does have an outstanding student loan, then some consideration is given to the potential benefit of repayment.
If you’d have a question about gifting to your children or grandchildren, then please get in touch via the form below or call us on 01825 76 33 66.
* Notes: How do Plan 2 student loans work, and how have they changed over time?