By David Jones, Dip PFS
If your child is heading off to university soon, or if you’re thinking of taking your first degree or diploma course (there’s no upper age limit for student loans), it’s important to understand how you – or they – are going to pay.
We often get asked for advice on the best approach to student finance; if you’re a parent, should you pay the costs yourself and help your child avoid taking on debt, or encourage them to take out the loan and then pay it off in full for them, or take the loan and then let it run, perhaps on the basis that the child’s income may be below the repayment threshold?
As always with Government benefits this can be a complex area, and there’s lots of helpful information at www.gov.uk/student-finance. The following notes provide a brief overview of the main rules, together with our suggestions for how to make the most of them to get the best value.
Please note that this factsheet only applies to those students beginning courses in 2013/14 or later; different rules apply for those already at University.
The Financing Available
There are three main components to student financing:
• Tuition Fee Loan – of up to £9,000 for a full-time student.
• Maintenance Loan – designed to help pay living costs,
• Maintenance Grant – also for living costs but not repayable.
Other means of support are available in some circumstances, including financial hardship or disability, but in the majority of cases support will be restricted to these three.
Tuition Fee Loan
The loan is paid directly to the educational institution in instalments at the start of each term to cover the cost of the course. The loan is repayable as part of the overall student debt.
This is paid into the student’s bank account at the start of each term and is intended to pay for living costs. The amount payable varies depending on living arrangements, as follows (all figures assume full-time courses):
|Living at home
|Living away from home, outside London
|Living away from home, inside London
|Studying abroad for a year as part of a UK course
The loan is repayable as part of the overall student debt.
This is also paid to the student at the beginning of each term to help pay for living costs. It does not have to be paid back and the amount claimable does not depend on
living arrangements, but it is means tested.
The full grant of £3,354 (for 2013/14) is available to students with a household income of £25,000 or less, with a sliding scale in place as follows:
|£25,000 or less
|£25,001 to £30,000
|£30,001 to £35,000
|£35,001 to £40,000
|£40,001 to £42,611
|£42,612 or higher
Any Maintenance Grant received will reduce the Maintenance
Loan available by the same amount.
Hint: If your income is likely to exceed the threshold, you
could consider making a pension contribution, as this will be deducted from
your income in arriving at your entitlement. However you’ll need to plan it in
advance, because the income figure used is usually the one for the previous
year. For example, grants for 2013-14 academic year are assessed on household
income in the 2011-12 tax year.
Repayments will begin once the individual’s income from all sources exceeds £21,000 gross per annum. If income drops below this level again in future, the repayments will be suspended until this threshold is exceeded again.
The repayments are calculated as 9% of the individual’s income above the £21,000 limit and are deducted by the employer each month via PAYE for employees, or must be made as part of their Self Assessment tax return for the self-employed or anyone who completes a return for other reasons.
As an example, if gross earnings are £30,000 per annum, the
repayments would be:
(£30,000 – £21,000) x 9% = £810 per annum or £67.50 per month
The loan can be repaid in part or in full at any time without any additional charge.
Any loan outstanding 30 years after repayments first became due will be written off.
The £21,000 earnings threshold will rise each year in line with average earnings.
Any individual moving abroad will continue to be liable for the debt, which will be repaid with reference to an equivalent minimum income in their new country of residence.
Interest on the debt is charged from the date that the student or student’s educational institution receives the first instalment.
Interest is charged at the following rates, dependant on the borrower’s position:
||RPI plus 3%
|Course complete but income below £21,000
|Income between £21,001 and £41,000
||RPI plus up to 3% on a sliding scale
|Income £41,001 or higher
||RPI plus 3%
What Should You Do?
The best course of action will depend on individual circumstances but in many cases the debt will begin to be repayable once employment has been found and, if we assume inflation (RPI) of 2.75% a year, the total interest payable will be between 2.75% and 5.75% per annum. Of course, inflation could be significantly higher or lower than this.
Let’s assume that you have enough cash to repay the outstanding loan. Should you do so?
Well, if you are a basic rate (20%) taxpayer, you would need to earn gross interest of between 3.44% and 7.19% on the cash to profit from keeping the loan in place. At the time of writing, even the best available five year fixed rate bond from a UK based bank would only produce 2.90% annual interest, so using the money to repay the loan would make sense.
In fact, if you have the cash available it may be better to either avoid the debt altogether, or repay it as quickly as possible, given that no early repayment charges apply. It should be borne in mind that interest begins to accrue from the date that the
first instalment is received, rather than the date at which the loan first becomes repayable.
Wait and See?
The interest cost is reasonable during the study period, though not cheap. However if you or your offspring takes up a career which attracts a relatively low salary – below
£21,000 this year – then the interest charged is only equivalent to RPI. Part time working or family career breaks might also reduce both the interest charged and the repayments for lengthy periods. Remember that any outstanding debt is written off after 30 years.
If you have the means to fund your children’s higher education you might consider asking them to elect to take the loans and wait until they have qualified before making a decision to perhaps pay them off.
The cost of higher education isn’t the only thing that many of our clients would like to provide for their children, and a choice might need to be made between funding this or perhaps providing them with a deposit for their first property. If you use your available resources ensuring that your offspring leaves university with no debt then their options for getting onto the property ladder might be limited especially with the level of deposit currently required. First time buyers are currently putting down an average of over £30,000 as a deposit, and although the interest charged on the student loan isn’t cheap it might be less expensive than the cost of mortgage finance if that’s required later on. So this decision depends partly on your financial situation and future expectations.
If as a parent you have set aside funds for your children’s higher education and, possibly, to help them get onto the property ladder, you might consider keeping your options open by encouraging them to take the loans available. You will then have the choice post qualification to help them clear the accumulated student debt or to buy a
It’s Not Just About Money
It’s important to recognise that these decisions aren’t always simply about money (in fact, they rarely are). You might feel that an approach which makes clear to your children the cost of a university education will help focus their minds more on study and help foster a spirit of self-reliance – one of the reasons for going to university in the first place. As always, clear intention and good communication is paramount, and it’s here that your adviser at Chesterton House can really help. Our expertise in ‘Values-Based’, family-oriented financial planning and long experience in helping people to make great decisions about complex issues can be really helpful in formulating a successful plan.
Let us know if you think we can help. You can contact us on 01509 610472, or at www.chestertonhouse.co.uk.
Factsheet Dated: 17th April, 2013
Written by David Jones, Dip PFS © Chesterton House Financial Planning Ltd 2013