There have been some significant student loan changes announced which may impact those who have children or grandchildren enrolled in university since September 2023, and those who are looking to study from next year onwards.
Student finance can be a complex aspect of the university experience, as well as a big financial commitment. It’s important to keep up to date with any changing terms.
In this article we discuss the key changes that have been made and outline the financial choices you can make to help fund your children and grandchildren’s university education.
Student loan changes to plan 5 terms
New students based in England face student loans on revised terms when they began their courses this autumn. The terms of Plan 5 are:
An additional decade
The maximum period their student loan can last for will be 40 years. This will start from the April after their course ends. For previous students, the maximum repayment term was typically 30 years. This additional decade means there is an increased likelihood that graduates will be paying the loan back for most of their working life.
A new repayment salary threshold
Student loan repayments will begin when the graduate earns an income of £25,000 or above, at the rate of 9% of total income. This will be fixed until April 2027, after which inflation-linked increases are planned. The threshold for existing Plan 2 graduates is £27,295.
Interest matches inflation
The rate of interest matches inflation, measured by the Retail Prices Index (RPI), against RPI+ 3% for the previous generation of loans. At present, both generations are capped at 7.3% (1 September 2023 to 30 November 2023).
How do these changes impact graduates?
With this new reform in place, 70% are estimated to have their loans paid in full, compared to a previous 25% repayment rate.
The reform also means that students may be repaying their loans for a longer period of time. It’s also likely that students will begin their repayments sooner after graduation than in previous years, as they are more likely to reach the new lowered income threshold of £25,000 in entry level employment.
Lower earners may feel the sting of a 9% repayment rate over a longer period of time with the extension of repayment to 40 years. However, the claim that this new reform targets low earners has been challenged by the government who say that those earning £26,000 for example, will only be paying back an extra £2 per month off their salary.
How can I help my children and grandchildren?
If you have children or grandchildren at or looking to go to university, the question of student finance raises some difficult issues. Is it better to pay these fees direct or wiser to make use of the student finance available?
It is almost impossible to know what salary bands lay ahead for new graduates, so the future repayment costs are almost an unknown. This makes it difficult to make a fully informed decision, but you can consider some pros and cons.
It may be that you can fully support your young family members and pay for their fees up front without the need for any loans. You can feel comfort in knowing they won’t have that 9% repayment deducted from their salary for a potential 30 to 40 years of their working life. A student loan can also affect your children or grandchildren’s affordability assessment with mortgage lenders in the future, so without the loan on their records there is no impact on any future financial activity.
The main downside to paying these fees up front means it potentially eats into the money you are intending to leave to them as beneficiaries of an inheritance. Is this money better saved for another event later in their lives such as buying their first house, or helping them to start a business venture after they have graduated?
If you wish to help fund a university education for the young adults in your family but need some guidance, please get in touch with our team of Financial Planners.