With the age of austerity, decreasing chances of getting on the property ladder and pay freezes across the board, some parents may want to help their kids out by paying off their outstanding student loans. But with interest rates on these loans soaring, is this really a good idea?

As calculated on yourmoney.com, interest rates on tuition fees are now over 6%. Assuming graduates build up £12,000 a year or so in tuition fees and maintenance loans, the debt grows pretty quickly. After 10 years, that debt would be worth around £21,832 and after 20, an eye-watering £39,722 (assuming no repayments). Note, this is just the fees for ONE YEAR.

The idea that a young person is starting off in life straddled by such an oppressive level of debt would make any parent feel panicked. However, simply paying off the debt does not, in the wider sense of things, make fiscal sense.

In some ways, you would be wiser to shift your focus on to other things. Helping with a deposit on a house, or lending money to set up a business, for example. As the Institute of Fiscal Studies reveals, two thirds of students never pay off their loans.

In fact, these loans do not even have to be considered until your child’s income reaches £21,000. On £22,000, the monthly repayment is £7. And on a salary of £30,000, it works out at £67 deduction a month, which depending on their circumstances, could be a mild annoyance or a serious dent in their monthly income.

However, it might be some comfort to learn that student loans are wiped out after 30 years, regardless of the amount paid off.

A couple of things are critical to the amount your child pays off:

  •      The salary or wage they are on
  •      Whether they take time off full time work to raise children
  •      The whims of the up and coming governments

Whatever you do to help your children is a personal choice. While helping them out in other areas will be more than likely welcome assistance, you will have to decide, based on their individual situation, what the best plan is.


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