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Welcome to MEREN Talks Your Money, the personal finance edition of MEREN Talks Money. In these bonus podcasts, we talk about the best strategies for making the most of your money. I'm MEREN, Sumset Web and with me senior reporter and Money Distilled author John Steppegg Hi John, Hey mil So. This week we're answering a question from James.
James asked should I attempt to pay my child's university fees and living costs, assuming I can just about afford to do so? Or do I encourage my child to max out the available student loans and only make repayments when absolutely necessary?
Right?
John, We've talked about this lot in the past and there is no straightforward answer. But let's start by just explaining how this system works because it has recently changed.
So how does it work now?
Well, I mean, let's see, you have to hear check what type is student loan you're on, and the types of student loans are all different between England, Wales, Northern Ireland and Scotland. But I think for this Particoarus James is from England, we'll just assume that his kid is starting UNI this year, and that means they're going into the Plan five student loan. And what the main difference there is that while the interest rate is lower, so it's just RPI.
And it used to be RPI plus three percentage point now it's API.
But the previous loan was written off after thirty years and this one isn't written off for forty years. So and also it's your.
Whole working life pretty much now, where you're not going to be buying that back at the end.
Of your work exactly, unless you unless you never earned more than twenty five thousand pounds a year. And actually the starting rate has gone down as well from the previous loan. Previous loans about twenty seven thousand to earn before you have to start paying it back. But basically, once you start earning twenty five thousand pounds a year, you pay it off at a rate nine percent on top of your marginal income tax rate. So basically this is much closer to their graduate tax than any previous
type of student loan has been. And so yeah, if you're if you have an average graduate, then they will lately be paying nine percentage points on top of the income tax rate for most of their work in life to pay their sortally.
So one of the things that we should look at right away is how much you can borrow. Right, So the average amount that people borrow pretty much everyone can well everyone can borrow their fees and fifty pounds a year, right And then depending on your academic year and where your at university, you get a certain amount for a
maintenance loan and there's a maximum for that. If you're living away from your parents outside London, which is the majority of people, I would say the maximum is nine nine hundred and seventy eight pounds a year, but that is means tested based.
On your parents' income.
Your parents' income is like I can't remember exactly what it is, but it's somewhere between sixty and seventy thousand pounds.
Yeah, it's but it's sexty OIDs and it does vary depend on the one whether you're in London or route to London or living me a pearance or not.
But yeah, and so if you can only get the minimum, it's just over four thousand, seven hundred pounds. So for an overful lot of people that are going to be looking at that in come wealth absolutely nowhere near enough to cover my living expenses. So even if you get your full student loan, you're still going to find yourself having to look elsewhere for money, having to work all the way through the holidays, et cetera, if you're self financing. So for a parent like James, even before we.
Get to should I pay tuition?
Should I pay this four thy seven hundred year of my child, they're actually going to be contributing quite a lot already.
Yeah, I think if you realistically, if you want to pay all of the costs, including the stuff that you can borrow money for, you're looking at a minimum be twenty nine a year from your post tax in company. And that really is a minimum because I mean, well, I mean more of sorts of just started journey, and I would say that they're pretty sensible and they also work them. Say else, I would say that probably the eleven course and an annual basis are between ten and
twelve grind a year. That's including rent, that's including you know, fun. You need to think about putting that away for them, as well as the two hundred and fifty year in student fees. So yeah, let's call it between twenty and twenty five grind depending on exactly where they're living and how much they work them, say elves.
Basically, Yeah, So the question then, or if you want to look at it in purely financial times, the question is do you think you will make enough money over a lifetime such that you will end up owing the state money hooray you won or you'll end up paying
the whole lot off. And that's the bit that you simply can't know because you have no idea how much you're going to earn over a career that I've got some numbers from aj Bell that show that if you start on the starting centary about thirty thousand pounds, which gradually increases over forty years with inflation but extra for doing well, etc. That would mean you'll end up repaying tiny bit less than you borrowed.
So that kind of makes sense. Yeah, anything above that, it doesn't too much make sense.
Well, I suppose. The other thing is I think it's easy to get stuck on the idea because even if you have these figures, you just don't know what your kids are going to earn. You don't know if they might end up taking career breaks, you don't know if they might end up marrying a rich husband or wife and not having to work at all, and so you know, there are lots of things that can harm. So I think the main thing you have to think about is assuming you can even afford this in the first place,
which is something else we should talk about. But you want to preserve the optionality as much as you can in this case, which is one reason why I think, even if you have this money to spare, why not stick twenty five grand in our bank account locking the interest rate each year, because now you're going to get an interest rate that beats RPI, tax John tax, yeah, and all taxes.
That interest is tax. So you might put it in a bank account, get more than RBI by one percentage point or so, but you're still going to lose it in tax, so that doesn't well.
You can I don't know what inflation with it is now. Especially RPI right now is under two percent. RPI is weirdly lower than CPI. If you could lock in a five percent interest rate, which you probably can at the moment, then you're still going to keep up with the loan in real terms. Or you could go for a small coup point gilt that's a wee bet and that's a bit federally.
That's possible, and then you don't have that problem. Okay, but that just takes care of the providing optionality during the university period when you keep it in catch. And the other question is what are the other things that you could do with that money? And we always say don't be the one of the greatest things a parent can do for a child. The greatest gift you can give your child is your own financial security.
You know, don't looking.
Don't be going to them looking for money when you're old, right, So if you can take that money in over three years, we're twaleking sixty grand plus pay seventy if you've paid it all. If you want to put that seventy off against your mortgage or into your eyes set, into your SIP or indeed into a set for your own children, or you can't put that much into a step for
your children, but some etcetera. Would that be more valuable to you than this confusing dicey difficult to quantify paying for your children instead of instead of leaving them with student owns.
Yeah, and I mean the other point about tax you're just making that I mean, they can stick four ground a year in a lifetime isser. There your kids then do own that. You know, that's that's their money, so you have given it to them. But again you put forward ground into a lifetime isser that gets instantly raised
to five grand. So I do think those sensible things to do rather than like, basically, I think there's a case to be said for always taking the low end and using other ways to offset against the loans and then can sell on what to do whenever they graduate.
And the only thing I would say about that, I get think about it after they've graduated to see how it works out, et cetera. But I look at the amount of tax that our young people take and I add the student loan to that, and this is something that we never had to experience. So let's say you go into your first job.
And you're earning in the high twenties. Weld on you.
By the way, if you're paying your twenty percent, you're paying your national assurance, then you're paying this nine percentage points and then you probably are and we'll get to this in another podcast, but you should be paying a three percent pension. Now your effective marginal rage of tax in your first job is well over forty percent, and that is a can you save your children from that?
Are you rich enough to save your children from that?
You have to quit a lot of money to save your kids from that? And yeah, I mean, psycholog it's a lot of ballast. And also I mean and also just sortry one thing we haven't touched on. But although this doesn't affect your credit worthiness and your credit rating, obviously it affects the amount you can actually borrow for a mortgage or pay for rent because you're getting you're getting charged an extra nine percent on top of your
tax rate. So if you have the wherewithal to pay it off, then you can argue about the mechanics of paying it off, but it's probably worth doing. It just boils down to that risky weather. It ends up being actually that was a dubs a waste of money because I wouldn't have I had to pay it off because for some reason, they don't earn as much as you expect them to earn over their lifetime. But I do
think the psychological element is important. But again, you know, the other thing I would say is, you know, maybe they would rather that you did have that if you had seventy five thousand pounds safe over the course of the university career. Maybe they'd rather put down a deposit in the house for that money and kind of stomach the nine percent and penalty.
Look at you wanting to give the young choices.
Yeah, I think it's a really checky one.
I mean, there's one more thing we should say before we close this, which is that I don't think enough students take advantage of the other types of finance on offer. So there are loads of scholarships on offer, there are lots of bursaries on offer. And the other thing that I think people don't know quite enough about is the grant system. There are too many charities in the UK, way too many charities doing too many things. And that's another podcast we will come to it again. But nonetheless
those charities exist. They offer all kinds of grants so you can go to your university, you know, if you're particularly good at any sport, if youre particularly academic, if there's all sorts of things. Is that there's a list on the UNI guide website. If you're from a particularly country, if you're the first person in your family to go to university, you're a passionate about a certain industry, whatever it is. There are all sorts of reasons you might be able to get a grant or a scholarship or
a bursary from the university. And then there is a brilliant website that I was having a quick look at earlier, called to turn to Us. It's also worth noting that the governments give grants to people in various things a social work, as doctor's dentists. If you're studying for any of those, you may be able to get a government grant, and there are websites that will help you look for grants for all sorts of other things as well, so that is definitely worth doing.
Basically, this has made the course of union much more pertinent and salient in people's minds, and I think it is worth consider on. You know, is this actually the best route. If you already have a strong idea what you want to do, then maybe an apprenticeship is better. I was looking at apprenticeships recently, and if you want to be an accountant, for example, and some people do, then you know you can get very good accountancy apprenticeships
you just you know you're doing. Basically, it's like getting paid to go to UNI and by the time you're done, then you're far ahead of the actual graduates because you've worked the company, you know, maybe it's anston young something like that, and you've been there for long enough that you're already embeddied and you're managing people your age who
are just coming out of UNI. So I do think that if you've got a fun idea what you want to do, and you're not worried about being somewhat locked down your past, and an apprenticeship is a very good option potentially.
Although you may be prepared to miss out on the parties.
Honestly, how many parties can you go to? And if you get this a my student debt hanging over you, and then this is why young people today are so much more sober than we will.
Can't afford anything.
No, I agree, this is another podcast altogether, but I do think that having the student debt and the pension payments hanging over them is something that is having a major effect on younger people today.
But that's another podcast. Thank you, John, Thank you.
So, as you can tell from our discussion, there is no actual answer here. It depends on your own personal financial situation. It depends on your priorities. It depends on the degree your child is doing, It depends on their job prospects later.
There's an awful lot.
Of things to bring into consideration here. We can't give you an absolute answer, but I hope that we've pointed you towards some of the things you should think about. Thanks for listening to this week's Marron Talks Your Money. Be sure to rate, review, and subscribe wherever you listen to podcasts. Also be sure to follow me in John on x or Twitter, at marinessw for me and at John Underscore Steppeck for John, and keep sending questions or
comments to Merrior Money at Bloomberg dot net. This episode was hosted by me Meren Thumbset Web and John Steppeck. It was produced by Summersadian Isabella Award Production Support and sound designed by Moses and