THE NEW ACADEMIC YEAR IS APPROACHING, WITH STUDENT DEBT FIRMLY IN THE POLITICAL SPOTLIGHT.
“Students now graduate with average debts of £50,000.” So said the Institute for Fiscal Studies (IFS) in a recent paper examining higher education costs in England. The higher education financing rules differ for the other three constituent parts of the UK, but all rely upon undergraduate borrowing to some extent.
For a student in England starting a course this autumn, their level of debt on graduation is likely to be more than £50,000. In 2017/18, maximum tuition fees will increase to £9,250 a year, and the interest rate charged on loans will jump to 6.1%. The IFS calculates that on average students will accrue a £5,800 interest bill over the duration of their course.
In England (and Wales) the loan currently starts to be repayable at the rate of 9% of income above £21,000, so a graduate earning £31,000 would pay £75 a month, which may not even cover the interest accruing on the debt. Fortunately, any outstanding debt is written off, but only after 30 years following the April in which the course ended. The IFS estimates that the government will eventually write off nearly a third of the interest and debt total, with fewer than one in four fully repaying their debt.
If you have children or grandchildren heading off to university at some point, these debt figures can appear daunting. Providing financial assistance by establishing some pre-funding arrangement – which might even be a pension plan – makes sense. However, it may be less wise to apply that money directly to paying tuition fees and/or maintenance rather than initially drawing down the student loan. In the worst scenario, upfront payment may simply reduce the government write-off. In other situations, there could be some financial logic in clearing the loan and avoiding high interest payments. Your funding plans therefore need flexibility built in.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.