Aug 6, 2018 | MARIE SMITH
When someone mentions university, many things come to mind. Beginning a career, gaining life skills, potential debt and the all-important degree itself. It’s a lot to consider and from time to time you may see media headlines regarding the fees, the pros and the cons. If the financial side of the decision is concerning you, we are here to help. But is it really all about the money?
What debt is involved in attending university?
Students can acquire debt twos ways at university – a loan for the tuition fees and a loan for living costs. The total figure at the end of a 3 to 4 year degree can be staggering and perhaps a little overwhelming. But this isn’t to say you should rush to clear the debt.
Can there be benefits to having student debt?
When it comes to student loans the answer is simply, yes. Paying off the loan once in a steady job can help teach a useful life lesson about budgeting. Although it is important to note that acquiring debt outside of the government scheme, on credit cards or overdrafts, is not advisable.
Should it not be paid off as soon as possible?
There are two sides to this coin. A student loan will begin to be repaid once the graduate is earning a certain salary. This varies depending on which student loan plan applies, degrees undertaken before September 2012 are Plan 1, anything after that is Plan 2.
Under Plan 1 the loans start to be repaid once the graduate is earning over £18,330 and the interest rates vary. The loan will be wiped clear 25 years after repayment begins.
Plan 2 provides a more generous leeway, but don’t be fooled, this is because the fees are far higher for those attending university post September 2012. Graduates will start to repay the loan once earning £25,000 or above, the loan accrues interest of between inflation (RPI) and inflation (RPI) + 3% and will be wiped clear 30 years after repayment begins.
In answer to the question, some graduates may never pay back a penny of the loan and it is a personal decision as to whether you see this as a positive. You may wish to pay back the loan irrespective of the potential salary.
If the graduate is earning a high salary, early repayment might be the sensible option. The graduate may be on course to repay the loan before the ‘wipe out’ threshold and therefore it may benefit them to become debt-free sooner.
On another note, although a student loan may not be considered debt when applying for a mortgage, outgoing repayments are taken in to account when expenditure is assessed. This could affect the affordability of the mortgage and is yet another thing to consider when it comes to early repayment.
There are currently no penalties for repaying the debt early and so an evaluation of personal circumstances is key before a decision is made.
Uni isn’t just about the cost, right?
As mentioned earlier university isn’t all about the cost involved, or even the degree itself. Time away from home teaches students everything from how to do their own laundry without turning everything pink to the value of money and how to survive in the working world. Some may argue that the life skills learnt far outweigh the knowledge of the degree itself.
A personal choice…
There is a lot to consider. We always chat to clients about these bigger picture scenarios and we know you don’t need help making this personal parenting decision. But if you have more questions or you need to analyse whether to repay a student loan early, get in touch.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 14 August 19. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information. Tax and estate planning advice are not regulated by the FCA.
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