Member Article

Student debt - inflation could push parents to help

In light of higher inflation figures in March, parents not yet committing to helping to ease the student debt their child is building up may want to think again.

As student loan interest is Retail Price Index (RPI) linked, based on the March figure of 1.6% this will increase the cost of borrowing for those with student loans. Last year the rate was 0.9% - the rate at which interest will accrue has now almost doubled doubled.

Kay Ingram, director of individual savings and investments at LEBC Group says: “The decision to help children avoid debt has to be based on whether it is financially a sensible move for the parents as well. It will depend on the individual circumstances and the decision still involves an element of risk.”

It may not be worth paying up front when:

A child is unlikely to earn more than the £21,000 (in today’s money) threshold. This would cost up to £27,000, which the child would never be required to repay. A child has average graduate income. This could lose the parent up to £25,500, this estimation is based on a graduate who starts on a salary of £25,500 and sees that rise each year at 2% above inflation.

However Ingram adds that parents can make a saving paying fees up front in the following scenarios:

The child earns a very good salary: the parent could save up to £26,000 in a scenario where the graduate gains employment at a starting salary of £35,000 and sees this rise heavily each year at 4% above inflation.

“An alternative to paying off the fees up front is to put the money aside until you have a better idea about the future, for example into an ISA or a savings account,” says Ingram.

“The interest earned in the meantime can be used to help offset the interest accrued on the student loan. In the short term however it should be noted the rate of interest chargeable to current students of 3% plus RPI is still significantly higher than the best cash ISA rates on offer.”

This was posted in Bdaily's Members' News section by LEBC Group Ltd .