If your child is about to head off to university they can expect to leave with a debt as well as a degree. The typical student in England graduates owing more than £44,000, according to the Sutton Trust – and that’s a lot of debt.
But student debt isn’t like ordinary debt, because you don’t necessarily have to pay it back. Students don’t start to repay their loans until they earn at least £21,000 a year. They then pay back a fixed 9 per cent of the amount above the threshold. In other words, if your child leaves university and lands a job earning £22,000, they would pay £90. Anyone who earns less than £21,000 doesn’t have to pay back anything at all. The debt is also wiped out after 30 years, so many people repay only a portion of the amount owing. In fact, about 70 per cent of students who graduated in 2015 are not expected to clear their debts, according to the Institute of Fiscal Studies.
The terms of the student loan agreement take some of the dread out of debt, at least for the students. Parents, though, are not so fortunate. Many will have to help fund the costs of university – and unlike their offspring they will have to pay back any debts.
You might be wondering why parents have to stump up for university. Surely the student loans cover the costs and our children can finally stand on their own financial feet? Well, yes and no.
There are two types of loan available to students. All students can apply for a tuition fee loan of up to £9,000 a year, rising to £9,250 in 2017, which is paid directly to the university. Then there’s the maintenance loan to cover accommodation, travel, food and other living costs. The maintenance loan is new for the current academic year 2016/7 and replaces the old maintenance grant.
It is also different from the tuition fee loan because the size of the maintenance loan depends on the size of the household income. For example, if your child is studying outside London and living away from home, the maximum loan is £8,200. But you only get the maximum if your annual household income is £25,000 or less. The loans also get smaller as the household income gets bigger until households that earn more than about £62,000 qualify for the minimum loan of £3,821.
Let’s just think about that for a moment. If your child can borrow only £3,821 towards their living costs, they are not going to live for very long, or very comfortably. The average weekly student rent is £109, according to the latest NatWest Student Living Index, so the loan would barely cover rental costs, never mind any household bills, food shopping, clothes, books, or travel. Parents would therefore have to help out. No wonder they are the second biggest source of income after student loans.
Of course, you might think it perfectly reasonable that wealthier parents pay towards the cost of their child’s university education. But I’m not so sure. My household income is more than £25,000 so my children would not qualify for the full maintenance loan. But I certainly wouldn’t describe myself as wealthy. I work hard and earn a decent income, but I struggle to pay the mortgage and raise a family. I will probably have to take out a loan to fund my children at university – and I will almost certainly have to pay it back.
I don’t really understand why the amount you can borrow is determined by the household income. A means-tested grant makes sense, but a means-tested loan? The student pays back the maintenance loan in the same way as the tuition fee loan, when their earnings hit £21,000. So the parental income should be irrelevant. You could even argue that wealthier households should be entitled to borrow more money because they have a greater chance of paying back the debt.
So next time you see a headline about student debt, by all means sympathise with the graduates, but spare a thought for the parents, too.
Naomi Caine is a freelance journalist and former Money Editor of The Sunday Times
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