Funding a degree in debt?

The new academic year is about to start, 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 the 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.

  • Maximum tuition fees have been increased to £9,250 a year, a figure that applies to nearly every course.
  • The interest rate charged on loans will initially be 6.1% for 2017/18, based on 3% above the March 2017 RPI inflation rate. 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. Depending on the then rate of inflation, £75 may not be enough even to 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 – for most graduates, that will be in their early 50s.

The IFS number crunchers estimate 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 loans.

If you have children or grandchildren heading off to university at some point, these debt figures can appear daunting. Providing financial assistance by establishing a pre-funding arrangement often makes sense. However, careful consideration should be given to applying these funds 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.

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