Should your clients pay university costs or let their children take on student debt instead?

If your clients have children who are heading to university in the coming months or years, they might be wondering how to approach paying for university fees and living costs.

There are three main options available to parents of university-age children:

• Pay university costs upfront out of savings, investments, or other capital
• Take out a loan to pay for fees rather than letting their child borrow the funds
• Allow their child to take on debt – the BBC reports that 1.8 million people now owe more than £50,000 in student loans.

The cost of tuition is likely to remain at £9,250 a year for most institutions in England, and £9,000 for many Welsh universities.

Plus, the cost of living remains high compared to before the pandemic. The average private landlord in the UK hiked their rent by 8.6% in the 12 months to June 2024, the Office for National Statistics (ONS) reports. Combined with food inflation and the cost of travel, this paints a daunting picture for students entering university life.

Moreover, your clients could be worrying that their child will not only struggle to make ends meet at university, but could then enter the job market with tens of thousands of pounds in debt.

So, should your clients pay for their child’s student fees (either out of savings or through taking out their own loan), or let their child take on student debt?

Keep reading to learn what you and your clients need to know about these options.

Your clients’ kids may never pay back their full student loan

First, it’s important to remember that those who attend university starting in 2024 might not be required to pay back their loan straight away.

Plan 5 students (those studying in England who are taking out maintenance and tuition loans for the 2024/25 academic year) will only start paying back their loans once they earn more than £25,000 a year. This threshold is frozen until 2027. They will then pay 9% of their income over the threshold against their debt, usually deducted automatically on their payslip when they start working.

As of April 2024, Plan 5 students are expected to pay a maximum interest rate of 7.8% on their student loans.

So, with the lower threshold standing at £25,000, your clients’ children may only pay a very small amount each month towards their debt when they graduate.

Plus, some may never clear their debt before they retire – at the time of writing, any remaining balance is written off after 40 years.

Take this scenario, formulated by the Student Loan Calculator:

• Matt has annual tuition fees of £9,250 and an annual maintenance loan of £9,200.
• He studies for three years and leaves university with £59,480 in student debt (including an assumed level of interest).
• Matt graduates into a role that pays £27,000. While in this role, he pays £8 a month towards his student debt.
• A year later, Matt is promoted to a job that pays £32,000, so now he will pay £45 a month.
• If he remained in his £32,000 a year role, it would take Matt 59 years to clear his student debt – but remember, it is likely to be written off after 40 years.
• So, even if he receives several promotions throughout his career, Matt may never pay the whole balance of his student debt.

As such, your clients need to be aware that although their children may emerge from university with a high amount of debt, their repayments are proportional to their income. And, depending on the amount they earn throughout their career, they may never pay off the full sum.

Paying for their kids’ university might help, but it’s important that your clients consider affordability first

Of course, if your clients are able to, they might consider simply paying university fees upfront and funding their child’s living costs while they study.

While this could take a weight off their child’s shoulders and ensure they don’t enter the world of work with a serious amount of debt, it’s important to consider whether your clients can afford this over the long term.

Your clients might need the funds for:

• Retirement
• Later-life care
• Helping with other important milestones, like boosting their child onto the property ladder.

Before they take the plunge and pay for their child’s tuition and maintenance costs in full, it could help to discuss this option with a financial planner.

We can assess your client’s financial situation and help to determine if they can afford to do this without compromising their financial stability.

Taking on debt on behalf of their children could be a viable option for some parents

Some parents may consider taking out a bank loan, or lending themselves money from their business if applicable, to pay for their child’s university education.

The potential benefit of doing so is that the child would enter the world of work with a clean financial slate rather than significant debt, but it could also mean your clients are paying off weighty loans into old age.

Indeed, the University and College Admissions Service (UCAS) states that doing so will “almost always work out more expensive in the long run” and that it is “not advisable”. While this may be true for some families, it’s important to consider your clients’ unique circumstances and explore every option available to them.

Talking to a financial planner may help your clients to determine the most appropriate course of action when looking at how to fund their child’s higher education and living expenses.

Get in touch

If your clients have university age children and would benefit from in-depth financial planning in this area, put them in touch with us.

Email enquiries@prosserknowles.co.uk or call 01905 619 100.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

All contents are based on our understanding of HMRC legislation, which is subject to change.