For students planning to head to university, it’s already been an emotional time. With exams cancelled and college suspended due to Covid-19, there has been some uncertainty around how grades will be awarded, which could affect where they head to study for the next few years.
As a parent or grandparent, you may be wondering if university is the right decision for them too. The good news is that research shows most students benefit financially from attending university. It’s a step that can pay off in the long run, but it’s still a significant financial undertaking for young adults.
80% of students gain financially from attending university
According to research from the Institute for Fiscal Studies, around 80% of students gain financially from attending university.
Over their working lives, men that have attended university will be £130,000 better off on average after taxes, student loan repayments and foregone earnings are taken into account. For women, the figure is £100,000. For both men and women, these figures represent a gain in average net lifetime earnings of around 20%.
Whilst one in five students are estimated not to benefit financially, at the other end of the spectrum, 10% of those who graduated with the highest returns will, on average, gain more than half a million pounds.
Unsurprisingly the subject studied is important for future earnings, with law, economics and medicine delivering the highest returns.
Of course, money isn’t the only reason to go to university, but future job prospects and long-term financial security should be a key consideration. However, the good news is that most students will benefit from studying throughout their career.
Increasingly, universities are offering degrees where students learn and get paid. As well as the practical experience, students can graduate with no debt, come away with a degree, and also have several years’ pension contributions in the bank.
The cost of university
University tuition fees were introduced in 1998 and have steadily increased since then. The maximum tuition fee for the 2020/21 academic year is £9,250, and it is this fee which is charged by the majority of universities.
With most courses lasting three years, students can expect to graduate with a student loan of over £27,000 to pay for tuition alone.
For many attending university it’s a chance to live alone and become independent for the first time. Whilst providing a great opportunity for a child or grandchild to find their feet, it means paying for rent, bills and other expenses whilst studying.
Most students will be eligible to apply for a Maintenance Loan to cover these costs. How much will be received through a Maintenance Loan will depend on a variety of factors, including household income and where the student will be living when studying. The average Maintenance Loan is £6,480 a year.
Why you might not want to pay back your child’s student loan
Add three years of the average Maintenance Loan to the tuition fees and the average student can expect to graduate with debt nearing £50,000.
So, you might be considering funding your child’s education, so they don’t graduate with this level of borrowing.
Before you do this, there are some important factors to bear in mind.
Firstly, graduates won’t repay any student loan if they don’t earn above a certain threshold. In the current tax year, new graduates would need earnings of £26,575 before they start making repayments. And, all remaining debt is wiped 30 years after graduation.
The Institute for Fiscal Studies estimates that around 83% of graduates will have some debt written off under the current system, meaning fewer than one in five students will repay their loans in full.
When earnings exceed £26,575, 9% goes towards repaying the student loan. So, if a graduate earned £27,000 in 2020/21, they’d pay back just £38.25. For those earning £35,000, annual repayments would total £758.25.
This is why it’s sometimes better to think of this as a ‘tax’ rather than a student loan.
If your child or grandchild never earns above the threshold, the loan will never be repaid. While they may be studying to be a doctor or lawyer now, in time they may decide to spend their life volunteering or being a full-time parent. You’d have paid tens of thousands in fees for no reason, as they may never have earned enough to have to make repayments at all.
Even if your child is likely to earn a good salary after graduation, paying back their loans may still not the best use of your cash.
For example, your son or daughter might want to buy a house when they graduate. While a mortgage is likely to be at a roughly similar rate to a student loan, the cash you were planning to use to pay off student loans could provide a substantial deposit that could enable much cheaper mortgage borrowing and save a large amount in the long run.
You also have to consider the opportunity cost of repaying the student loans. The interest rate on student loans is relatively low, as it’s set between inflation and inflation +3%, depending on earnings. Depending on your risk profile, £50,000 invested over 30 years could well outpace the interest on the student loan.
And, once the loan is repaid, your money is no longer accessible.
One final factor to consider for overseas clients is: what happens when you return home? If you or your child return to Australia or New Zealand, for example, you’ll need to consider what happens to the debt and the income threshold calculations. Our advisers can help you to unpick these issues.
Get in touch
We’re here to help you answer questions like these and address any concerns you may have. If you’d like to discuss how you can financially support loved ones through further education, please get in touch or call (01372) 724 249.
