Prepaying / repaying student loans

Are student loans something to avoid?

With the 2024/25 academic year on the horizon, student finance is again a hot topic for many parents. How hot differs slightly for the UK’s four nations as each has a subtly different way of funding students and, outside Scotland, their tuition fees. However, the broad principles are the same:

1.    Loans carry ‘interest’, usually at a rate linked to RPI inflation in March of each year (4.3% for March 2024). The rate levied can vary based on whether the student is still on their course and, if not, their level of earnings. When inflation is particularly high – as happened in 2022 – the rate may be capped at a lower ‘prevailing market rate’ (currently 7.9%).

2.    Loan repayments only begin once income exceeds a certain level. For example, for graduates in England who started their course between 2012 and 2022, the threshold in 2024/25 is £27,295. The repayment rate is 9% of income above the threshold – effectively the same as an extra 9% on income tax rates. If a graduate’s income never reaches the threshold, then they repay nothing. On the other hand, a high-flyer who ends up in an investment bank may clear their debt before reaching their thirties.

3.    Unless the loan has been fully repaid earlier, it is written off on death or at the end of a fixed term, which can be 25, 30 or 40 years, depending upon the country and the start date of the loan.

All those variables – and governments’ propensity to tweak components such as the income threshold – make the calculation of how much loan any student will repay at best a highly contingent guesstimate. The important point is that repaying all or part of a loan early, or even not drawing a loan initially, may represent an unnecessary gift to the government. ‘Paying down’ the loan does not actually impact on the amount owed, which is pegged to the earnings threshold rather than the size of the loan. The only certainty is that the person making the payment will not be able to get the money back. 

If you are considering helping a student/graduate child or grandchild to reduce their student debt, think carefully and, if necessary, take advice before acting. It may be wiser for you to help with another financial obstacle, such as the deposit for a first home.