paying off kids student loans...

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81881899#Comment_81881899

Welsh student finance has different rules. This should impact decision making. Firstly, everyone gets the full amount, though how much is loan and how much grant is determined by income. But it will mean the total loan will be less than a student from England. Also the Wales slc have said they won’t lower the threshold, which means repayments will be lower.

2hc9kmju

I'm a retired chartered accountant and there is a lot of misinformation about the financial impacts of having student debt. Many articles I've read seem to be based on the author's personal perspective on whether student debt is a good or bad thing and not on the actual financial position of the graduate concerned.

Firstly, many students will not pay off the full value of the debt and any interest "charged", but before explaining exactly why, let's look at how student debt is different from a "normal" loan.

Differences between a loan and Student debt

When you borrow money - for a car, home improvements or a holiday - it is often a fixed interest loan for a fixed term. When you take out the loan, the lender calculates exactly how much you need to repay each month to repay the loan and all the interest.

Similarly with a mortgage, the lender will recalculate repayments annually to reflect any changes in interest rates and to ensure that repayments over the 20, 25 or such period fully repay the loan.

This is NOT how Student Debt works!

Student debt repayments are based upon income and, more importantly, income above the repayment threshold.

So it isn't a 9% tax as it is 9% (or whatever the rate is relevant to your loan plan) on income above the threshold.

Why many students will pay less interest than the "headline" interest rate

By headline rate I mean the rate of interest used to calculate interest on the debt… And "Effective" interest rate is actually the amount of interest they will actually pay.

Let me give a simple (and rather simplistic) example.

Let's say the threshold above which repayments are charged is £28,000. Let's also assume that your son/daughter is earning £30,000 (and for simplicity) their salary remains at that level for 30 years. And the RPI remains around 3% (and doesn't shoot up and remain significantly higher for an extended period of time). How much will they repay over the term of the debt? £5,400, in other words, their effective interest rate is NEGATIVE.

Ok, so let's say they are earning £50,000 per year for the 30 years, total repaid just under £59,400 - a lot of money, but still no more than they actually borrowed - interest rate effectively 0%.

And £100,000 for 30 years - total repaid £93,200 - even more money, but the effective interest rate is 6% and paid off in 16 years.

I have only indexed the income threshold for the £100k example as it has significant impact in that case. In the £30k and £50k examples, indexation of the threshold would reduce the actual amount repaid and thus both would have negative interest rates.

So the real question is not how much interest is being "charged" on the student debt, but how much they will actually have to pay by the time the debt is written off. As can be seen, it requires a very significant income to repay the debt in full. In fact, you'd need to have an income over £77,000 for all 30 years to repay the debt in full. It would take 29 years and have an effective interest rate (at current RPI) of 6%.

To assess the actual impact for an individual requires information about when their debt repayments started, how much they borrowed, repaid to date as well as an estimate of salary increases over the next 30 years or so and the expected rate of inflation… So, not an easy or straightforward task, but one that can be dealt with by most AI tools - though a word of caution, the result you get is only as good as the information you give it.

Lastly, a couple of other things to take into account - as I understand things, the debt balance cannot be taken into account by lenders when assessing a graduate for a loan - car, holiday, mortgage or similar; however, they can and may take into account the monthly repayment of student debt in assessing whether the graduate can afford to repay the loan. However in this regard, this is no different to other regular "expenses" like other loan payments, rent or board, etc. Lenders determine for themselves exactly what they take into account and what effect it has on their decision.

Also, don't forget that any absence from the workforce - such as having children, being made redundant or leaving a job to set up a business is likely to result in lower total repayments.

So, setting aside the complex maths to determine whether to repay the loan early or not, unless your son or daughter is earning a significant salary already, repaying the loan early is not likely to be a good idea.

Remember that the important interest rate in this discussion is the effective rate determined by how much they will repay and not the headline rate, which is used to calculate the interest "charged" on the debt, but is never likely to be paid.

In conclusion, you and your son/daughter should review the position annually, especially if they have received a significant pay rise, such as after gaining a promotion or starting a new job (with a significant pay rise).

2hc9kmju

Silvercar, the proposal in England isn't to reduce the threshold, but not to increase it by RPI for three years, I believe.

Still a betrayal of all students and if the debt was with a private lender, would probably be breach of contract. But as Martin found out, the Government can do largely what it wants in this space with no grounds for graduates to challenge…

I think the all of the other countries in the UK have said they won't "freeze" the income threshold.

Still results in lower repayments than in England, but it isn't a reduction in the threshold.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81890363#Comment_81890363

True. But if incomes go up and the thresholds remain the same, in real terms it has the effect of increasing repayments. Fiscal drag.

fuzzzzy

https://forums.moneysavingexpert.com/discussion/comment/81890340#Comment_81890340

One thing that is not much talked about is the effect that repaying a student loan will have on taxable savings interest.

As I understand it, with the freezing of the repayment threshold for a plan 2 loan for example, a graduate on a modest salary of £30k will find themselves paying an additional 9% "tax" on all of their savings interest.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81890715#Comment_81890715

Only if their unearned income exceeds £2,000 in any year.

MyRealNameToo

Ultimately it's complex, there are different rules for the different home nations and when the loans were taken. Similarly it depends on what their earning potential is and if they are ever likely to emigrate.

Articles are often general advice, they can't realistically cover every permutation and consideration and so often will only look at the most common scenarios. Understandable but if you dont match that scenario its not advice for you.

Some will never earn enough to have to start repayment so any idea of paying it off early wouldnt be the most economical one.

fuzzzzy

https://forums.moneysavingexpert.com/discussion/comment/81890855#Comment_81890855

Thanks, I find it difficult to find accurate information on how unearned income affects repayment of student loans as I keep finding conflicting information.

Can you signpost me to a reliable government website with the correct information regarding now unearned income is treated.

EDIT : So is this example below given on the student loan calculator website incorrect?

Savings Interest Example:

If you have £20,000 in a savings account earning 5% interest, you'll receive £1,000 in interest annually. As a basic rate taxpayer, this is within your Personal Savings Allowance so you pay no tax on it. But it still gets added to your total income for student loan calculations.

• Employment income £29,000 + savings interest £1,000 = total income £30,000
• You're £2,705 above the Plan 2 threshold, owing £243.45 in student loans
• Your employer deducted £153.45 through PAYE
• You owe an additional £90 through Self Assessment on the savings interest

This example above seems to contradict advice on the same website elsewhere that says in the key takeaways:

Unearned income above £2,000 is included in its entirety alongside your earned income for loan threshold calculations — even small investment portfolios can trigger additional repayments

https://studentloancalculator.uk/guides/investment-income-dividends-student-loans-uk/

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81891226#Comment_81891226

This is from the horse’s mouth, so to speak:

https://www.gov.uk/hmrc-internal-manuals/collection-of-student-loans-manual/cslm16035

fuzzzzy

https://forums.moneysavingexpert.com/discussion/comment/81891791#Comment_81891791

Thanks.

Is unearned income always taken into account in computing Student Loan repayments?

Unearned income may be taken into account in computing loan repayments only if

• The amount of unearned income exceeds the threshold, currently £2,000

And

• The borrower receives an SA return

So if you do not get asked to complete a SA return you won't be assessed on unearned income even if it is over £2k?