The Bank of Mum and Dad (and its parent company, the Bank of Gran and Grandad) have been doing brisk business as cost pressures on younger generations multiply.
For those who can afford it, helping their children or grandchildren on to the property ladder and funding university costs upfront confer significant financial advantages. If you had to choose just one, how could sweeping changes to the student loans system alter the equation?
Under the current system for post-2012 graduates in England and Wales, only the highest earners will ever repay their student loans (and interest) in full — about one in four borrowers.
The rest will pay a 9 per cent “graduate tax” on earnings above the £27,275 repayment threshold for up to 30 years, at which point the loan is wiped.
Let’s assume parents have a lump sum equivalent to the average graduate debt of around £45,000. For the majority of students who will never repay in full, it probably makes more sense to use this as a housing deposit.
There are lots of variables to consider, but if your child never earns more than the repayment threshold, they won’t have to repay a penny. What they might save in rent versus mortgage repayments over decades could exceed the “graduate tax” they’d pay — plus they’ll end up with an asset.
So what about the proposed new system? From 2023, future graduates will start to repay student loans sooner (the threshold drops from £27,275 to £25,000) and continue to pay them back for much longer (up to 40 years).
The sweetener is a lower rate of interest. The current top rate of interest on student loans is RPI plus 3 per cent (note that rates are capped at the equivalent prevailing rate for unsecured personal loans).
Under the new system, the rate would simply be RPI.
These may seem like small tweaks, but they will have a big impact on graduates’ finances for decades to come.
Around 60 per cent of future students will now repay their loans in full, according to analysis by the Institute for Fiscal Studies. So could this strengthen the case for parents trying to repay ahead of time?
Surprisingly, if your child is among the highest earning graduates, the answer is no.
According to the IFS, the highest earners stand to gain £24,000 under the new system, as lower interest rates and a faster rate of repayment will enable them to clear their debts faster.
There’s little difference for the lowest earners, who won’t repay anything at all if their earnings stay below the £25,000 threshold.
The overall impact is much the same for those on higher middling earnings (typically earning around £46,000 at age 30). Under the current system, they wouldn’t have repaid their loans in full. Now they will, but the lower rate of interest balances out the extra years of repayments.
And the biggest losers? Graduates with lower middling earnings (typically earning around £37,000 at age 30) who stand to repay around £19,000 extra, according to the IFS. They won’t earn enough to repay their loans and interest in full, so will be effectively stuck on a higher tax rate for an extra 10 years.
It’s hard to predict your child’s earnings potential over the next 40 years, but once they have graduated and landed their first job, it’s a little easier.
As those with high salaries will pay off their debts much faster, might parents try to help lower earning siblings first?
And should they prioritise helping daughters over sons?
According to the IFS, men will repay around £5,500 less under the new system, whereas women will pay about £6,600 more.
“This is because women tend to spend more time out of work than men and on average earn less than men even when in work,” says Ben Waltmann, senior research economist at the IFS. “As a result, men are much more likely to pay off their loans and benefit from lower interest rates.”
If you can afford to help your children with either student loans or property deposits, then they are very lucky indeed.
The obvious risk for millions of lower earners still repaying student debts into their 60s is much lower levels of pension saving — all the more so if they’re paying off a 40-year mortgage.
I am also concerned about whether students and parents really understand how the system works.
Your Juno, a financial education platform aimed at Gen-Z women in their 20s, was alarmed to discover that its members listed “repaying student debt early” as one of their biggest financial priorities.
The urge to clear debt is commendable, but student loans don’t work like other debts. Paying back a few extra hundred pounds is the equivalent of choosing to pay extra tax.
“So many people have student debt, but so few people actually understand it,” says Your Juno co-founder Margot de Broglie. “Why is this not properly explained when people take out student loans?”
Data from the Student Loans Company shows that in the past financial year, 117,700 borrowers in England chose to make “voluntary repayments” totalling £317mn — an average of £2,700 per person.
It’s impossible to tell whether this money is coming from wealthy parents, or worried graduates. The repayments web page warns only to do so “if you think you can pay off the full balance before the term ends” but how many understand this?
In future, the government will make it impossible to take out student loans unless you have GCSE maths and English. Why not introduce a further requirement — passing an online module about how student finance really works?
This could cover the difference between tuition fee and maintenance loans, and how the maximum amount you can borrow depends on your parents’ income (better-off parents are tacitly expected to pick up a bigger slice of the upfront costs).
Given the inherent bias in the new system, we need to ensure students understand how the lifetime costs could vary according to how much they earn and how repayments will be taken from their future salary (perhaps they could do a refresher module prior to graduation).
This will mean prospective students enter into these long-term financial contracts with their eyes open and hopefully start thinking about the biggest financial equation of all — whether a university degree is worth it.
Finally, some of the money recouped from higher repayments should be invested in world-class careers guidance for school and university leavers.
Decisions about what subject to study, and even whether to go to university at all, should not be hurried. It is vital that tomorrow’s graduates do not spend the next 40 years regretting their decision.
Claer Barrett is the FT’s consumer editor: email@example.com; Twitter @Claerb; Instagram @Claerb
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