Should you use savings to help children pay for university?
by MATHEW ANGELL, Dip PFS
Over your child’s life, you may have built up a nest egg to give them a helping hand as they become independent. If they’re planning to go to university, you may be thinking about using these savings so they don’t need to take out a student loan, but is that the best use of the nest egg?
Taking out a student loan has become the normal way to cover tuition fees and living costs when studying for a degree. While common, the amount of debt students graduate with can seem scary. An average student will graduate with around £45,000 of student debt.
This includes tuition fees, which are capped at £9,250 for courses starting in 2021. Over a three-year course, that adds up to £27,750. The remaining total is made up of maintenance loans, which can be used to pay for accommodation, bills, and other living expenses. Starting working life with debt of £45,000 can be daunting and if you’re in a position to offer financial help, it’s natural to want to do so.
Yet, in many cases, a student loan is an efficient way to pay for university.
Why a student loan makes sense for many students
A student loan doesn’t work in the same way as a traditional loan.
Rather than having to meet repayments regularly, student loan repayments are deducted from pay once a graduate exceeds certain thresholds. In this way, it works more like a tax than a loan.
Students heading to university this year won’t have to start making repayments until they earn the equivalent of £27,295 a year. Once they reach this threshold, the amount they pay is fixed at 9% above this amount. So, if your child goes to university and struggles to find a job or takes a lower-paying job, they won’t need to make any repayments.
Even when a graduate exceeds the threshold, the payments are relatively low. If they earn £35,000 a year, they’d need to pay just £693.45 towards their student loan a year. That works out at less than £60 a month.
So, for most graduates, a student loan won’t have a huge impact on their lifestyle or income.
Two other points make a student loan an attractive way to pay for university:
- It’s not treated like a traditional loan when applying for credit. Having a student loan shouldn’t affect a graduate’s ability to borrow money, including a mortgage, as they are not included in credit files. However, it can affect affordability checks as take-home pay will be lower.
- After 30 years, any remaining debt is wiped. While £45,000 of debt sounds like a lot, the reality is that most people won’t pay it all back within 30 years.
While high earners will face higher monthly costs and will repay the loan, a student loan still often makes sense as the repayments will increase in line with their income.
As a parent, using the nest egg you’ve saved so your child doesn’t have to take out a student loan may not be the best use for it, but that doesn’t mean it still can’t support them through university.
The gap between living expenses and the maintenance loan
While most students will use a student loan, they often find there is a gap between the loan amount and actual living expenses.
How much students can borrow through a maintenance loan depends on several factors, including where in the UK they are from, whether they’ll be living at home or independently, and their household income. For instance, an English student living away from home coming from a family with a household income of less than £25,000 could receive an annual loan of £9,488. If the household income increased to £55,000, the available loan amount would fall to £5,412.
It’s important to check how your household income will have an impact on the amount your child can borrow and what this means for their budget.
To bridge the gap between the loan and living expenses, many students take on a part-time jobs. According to Save the Student survey, 74% of students work while studying. Some 71% of students said they worry about making ends meet. 58% said this affected their mental health and 32% said their grades suffered as a result.
Rather than using your entire nest egg to replace a student loan, using a portion of it alongside a loan can help your child be more financially secure while they’re studying.
Alternatively, you may decide to keep the money safe until after they graduate. It could help them find their feet as they start their career or be used as a house deposit to create long-term security.
If you’re not sure how to use a nest egg you’ve built up, or want to lend financial support to your children but need to understand the impact on your long-term wealth first, we’re here to help.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
ABOUT THE AUTHOR
MATHEW ANGELL, Dip PFS
Director & Financial Lifestyle Planner
Matt’s goal is to help you develop great financial habits and make sure your life is at the forefront of all plans that are put in place. His vision is to be your trusted partner through your life, there to help you through the difficult times and appreciate the good.