Member Article

University fees - options on how to pay?

With ‘A level’ results imminent and thousands of students preparing for university, parents should consider the financial implications and options carefully, says Kay Ingram, director of national financial planners LEBC Group (LEBC).

“Many parents will be keen to pay their children’s fees up front to avoid them building up such a big debt. However, whether this is a financially sensible move for the parents will depend entirely on individual circumstances and the decision will still involve an element of risk.”

Student loans are proportionate to income, effectively making them more like a tax than a loan, and will be written off if they are not repaid within 30 years. To illustrate whether it would be worth paying off a debt up front, LEBC highlights three scenarios assuming a debt of £27,000, based on three years of tuition fees, is paid off straight away:

Your child never earns above the repayment threshold. This would cost you up to £27,000, which your child would never be required to pay.

Your child has average graduate income of £28,000 and this rises by 2% above inflation each year. The debt would be written off after 30 years, by which point your child has repaid £36,310 in today’s terms (students who started university from 2012 will repay 9% of everything earned above £21,000 a year, £1,750 per month, once they have graduated). Paying off early would result in an overall saving of £9,310 during the course of 30 years.

Your child starts on a salary of £35,000 and this rises by 2% above inflation each year. The debt would be settled in full after 23 years, by which point your child has repaid £41,690. Clearing the debt at the outset would result in an overall saving of £14,690 over the course of 23 years.

Ingram adds: “This, of course, is without factoring in the maintenance loan. Under the second scenario if the child secured the minimum maintenance loan of £3,821 per annum then, over the course of 30 years, they would have still repaid £36,310 in today’s terms but would have borrowed £38,463 from the Student Loans Company rather than £27,000, which would negate the savings.

“It may be sensible for parents to put money aside until they have a better idea about the future, for example into an ISA or a savings account. The interest earned in the meantime can be used to help offset the interest accrued on the student loan. However, in the short term, the rate of interest chargeable to current students of RPI plus 3% is significantly higher than the best cash ISA rates on offer.”

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