Should we pay off our grandchild’s university debt or give them the money to help with their future?
Should we pay off our grandchild’s university debt or give them the money to help with their future?
Find out what type of plan your grandchild has
Student loans are far from straightforward and very few people will ever end up paying the top rate of interest on their loan. Before you settle your grandchild’s debt, there are some key things to bear in mind.
You need to find out which repayment plan they are on. Broadly, if they started their undergraduate course before 1 September 2012, they will probably be on Plan 1. If they started after this date, they are likely to be on Plan 2. The table below shows the key differences between these plans:
Plan 1 | Plan 2 | |
When you start repaying | Once earnings exceed £19,380 a year | Once earnings exceed £26,568 a year |
How much you repay | 9% of earnings above the threshold | |
Current interest rate | 1.1% | 5.6% (whilst studying) 2.6%-5.6% (after graduating – depending on earnings) |
Loan written off | After 25 years | After 30 years |
Think about how long it will take them to repay the loan
A student loan does not work like a conventional loan. You only start repaying it once you are earning above the threshold and if you don’t manage to clear it during the loan period, the balance is written off. This means that extra repayments should perhaps only be made if you think your grandchildren is likely to repay the full balance of the loan before the loan term ends. Let’s look at an example to see how this works in practice:
Plan 1 | Plan 2* | |
Total student loan taken | £50,000 | £50,000 |
Grandchild’s earnings (increasing by 4% p.a.) | £30,000 a year | £30,000 a year |
How much will you repay? | £24,262 | £15,650 |
When will the loan be cleared | After 25 years | After 30 years |
Outstanding loan written off at the end of the period | £25,738 | £34,350 |
*Source: Money Saving Expert — Student Loan Calculator, 2021
The amount repaid on a student loan is linked to earnings rather than how much is outstanding. So in the above scenarios, if you paid off the £50,000 balance, then you would effectively be repaying an extra £34,350 under Plan 2 which would have been written off after 30 years anyway.
Consider gifting your grandchild the money instead
So you want to help, but maybe paying off the loan is not the way to go. Perhaps buying a house is a more pressing concern for your grandchild? If they have a Plan 2 student loan, then their loan may have a higher interest rate than a mortgage but the monthly repayments on a mortgage are likely to be far higher than their student loan repayments – and the mortgage certainly will not be written off after 30 years.
If you gifted £50,000 to your grandchild which they invested, and achieved modest returns of 3% per annum after fees and inflation, then that investment could be worth £56,275 after five years. This could help with a house deposit. Assuming the same rate of return, it could be worth £117,828 after 30 years, which could help towards their retirement. There are many different ways the money could be invested, including through the use of ISAs, investment portfolios and pensions. A financial planner can help you understand the best option. Please do bear in mind that the value of investments fluctuates and you could end up with less than you originally invested. The rate of return used is for illustrative purposes only, returns could be more or less than this.
Talk to your grandchild
The best place to start is of course with a conversation. Perhaps the thought of being debt-free is a bigger motivator for your grandchild than buying a car or house, or they might feel differently when they see the numbers set out, as we have done in this article. Either way it is a great opportunity to introduce future generations to the importance of setting financial goals early on in life.
Tilney can help
If you want to know more about the best way to financially help your loved ones, Tilney can help. To find out more, book an initial consultation online or call 020 7189 2400.
This article does not constitute personal advice and you should not take any decisions based on its content.
Issued by Tilney Financial Planning Limited.
Disclaimer
This article was previously published on Tilney prior to the launch of Evelyn Partners.
