Category: Students

Should you pay your Childs University Fees to Save them Getting into Debt?

It can be very difficult watching your child leave university with a huge amount of debt piling up. It can then get even scarier when you see their statement and it looks like they owe huge amounts of money and the interest means that the amount they owe will pile up. However, unless they have a career development loan (which works very differently), having a student loan should not be seen as scary and there should normally be no advantage in paying in back early.

It is worth looking at a student loan in terms of the repayments rather than the amount owed to start with. They will only have to start repaying when their income is above £21,000 and then it will only be a small percentage which will increase as their salary increases. If they take time off work, perhaps through illness, to have children or work part-time or work at a low income job, their repayments will stop. This money will not need to be repaid at a later date in most cases and they will not be penalised for not paying, in the way that you would with any other type of loan.

This means that most people will not repay their entire loan as after 30 years the debt is written off. So many will never pay back any of the interest owed anyway and probably not the even the money that they borrowed. Of course, you may feel that it should be paid back because you feel morally obliged to which is a different situation. They have no obligation to do so unless they are earning a high enough salary.

If they are a middle income earner (so having to make some loan repayments but not the full amount) but you have a spare lump sum to pay towards the loan, then this could be a waste of money. It is important to do the maths on this one. Consider how much is being repaid each month and how much will be repaid in total. Consider what will be left. If the lump sum is paid and after the thirty years they still owe money this will be written off. If you have paid in the lump sum, less money will just be written off and therefore they will still make the same monthly payments but will end up paying in more than they needed to over the term. As a parent you will have just been contributing to the government’s income and not making any difference to your child’s financial future at all. So unless you can pay in enough to clear the debt or allow it to be paid off sooner, your child will not gain anything financially. Even if it is enough to clear the debt or allow it to be paid back sooner, it still may not be the best financial decision to do this.

For those who are earning really high salaries from when they leave university and expect to continue to do so, they will pay their loan off before the end of the term and so they will benefit from paying it off early to avoid that interest. But you need to be able to see into the future to know whether this will apply to your child and whether they will continue to have the same high earnings for thirty years. Even if you are confident that this will be the case, it is worth considering whether this is the best use of your money. Chances are that theywill want to buy a home. You may be better off using the money to pay towards a deposit on a mortgage or to pay off a mortgage or other debts. It is well worth comparing interest rates here to see which would be better. If they have credit card debt then this will be very expensive and much more worth paying off. If they have a mortgage then it could be more expensive, it will depend on the current rates and you will need to compare them.
You will also need to consider which you think will be more worthwhile, paying off their mortgage or paying off a student loan. As well as the cost consider what would happen if they had a sudden drop in income and how they would manage. They would not have to make their student loan repayments, but they would still need to pay for that mortgage.