Ask the Expert: Should I take out a loan to help my daughter through university?
PUBLISHED: 14:21 06 October 2017 | UPDATED: 14:21 06 October 2017
Is it wise for parents to take a loan out to pay their daughter’s way through university? Carl Lamb of Almary Green responds.
Q. Our daughter is 16 and we’re starting to think about which university she should go to, and how to pay for it.
We’ve been looking at taking out a loan ourselves so she doesn’t have to have to take out a student loan. But my husband’s job isn’t very secure, so we are a bit worried. What do you advise?
Response from Carl Lamb of Almary Green:
A. For many families, student loans can provide the best option to cover tuition fees and – if needed – living costs, so please do look at this option carefully before you go out and incur debt yourselves that you might not be able to manage.
The important thing to remember about student loans is that many people will never fully repay them. Once you’ve left university, what you are asked to pay is effectively a retrospective contribution towards your university costs and only then if you earn over the threshold.
This currently sits at £21,000 but it’s just been announced that it will go up to £25,000 in April 2018. The amount that must be repaid is 9% of what you earn above the threshold: for example, currently if you earned £22,000 you would repay 9% of £1,000 (ie £90) over the year.
That is deducted directly from your pay by your employer. If you lose your job or your income drops below the threshold, repayments will stop until your earnings go up again.
However much your daughter takes out in student loans, she will never pay back more than 9% of her earnings over the threshold (unless the rules change). She could take out both a tuition fee loan and a maintenance loan (to cover living costs) and the repayments will be just the same as they relate to her earnings, not the amount owed. Importantly, any unpaid student loan is written off once 30 years have passed since leaving university. In practice, only high earners will repay the whole loan.
Interest is charged on student loans – the rate depends on where you are in the process and how much you earn but can be quite high if you earn over the threshold. The interest is added to the amount owed.
Given the uncertainty of your husband’s job, it may be better for your daughter to use student loans to cover her university costs and for you to delay helping her until a little later – perhaps when she buys her first home – when your own finances are a little more stable.