One of the big decisions for parents, grandparents and eventually students is “do I repay my university expenses”?
You’ll note our careful use of the word “expenses”, as the term “student loan” too frequently is associated with debt and a student loan could arguably more accurately be described as a tax because;
- The loan is only repayable once earnings exceed an income threshold (£27,275 for current students and £25,000 for new University students), then at a rate of 9% for earnings in excess of these thresholds
- They are repaid through the income tax system
- Repayments increase with earnings and will continue through a working life
Implications of the recent revision to loan payments
The recent announcement that student loans will now be “written off” after 40 years, an increase of 10 years from the current time, combined with the lowering of the above repayment thresholds, may result in many having to choose between accelerating the repayment of student loans, saving for a house deposit, or funding a pension.
On a purely financial level, there’s a strong case to wait until any student starts work and then assess their earnings at that time.
Aside from an emotional desire to not have an outstanding “expense”, why repay a student loan faster than is necessary when:
- The funds could be used for other purposes and
- The only obligation is to repay the loan at 9% above the current thresholds?
The new repayment terms (lower income threshold and longer repayment period), albeit with a slightly lower rate of interest applicable, will, according to the Institute of Fiscal Studies (IFS) result in a higher proportion of students (60%) now repaying student expenses in full.
Interestingly, analysis to date indicates the losers under this new system will be graduates earning approx. £37,000 at age 30 (lower middling earnings) who could end up paying an additional £19,000 under the new system.
One solution doesn’t fit all, even within the same household
Lowest earners will likely fall under the revised thresholds and higher middling earners will be repaying for longer but with a lower interest rate applying and likely little difference to the current structure.
We suggest these revisions require a more flexible approach to student loan repayment and potentially different strategies for each child, depending upon ages, earnings, and their individual situations.
Above all, full repayment of student loans may feel like a sound use of money but in many cases, it could be argued this is an unnecessary and premature payment of “tax”.
Further useful insights and advice from the Money Saving Expert:
Student loans tuition fees changes.
If you have a question about repaying university expenses, please complete the form below or call us on 01825 76 33 66.
