Are you better off paying your child's tuition fees upfront or applying for a student loan to spread the cost now tuition fees have soared? Here are the facts.
If you have children about to start university then tuition fees are likely to be at the forefront of your mind.
With the top universities charging anything up to £9,000 a year it's not easy to stump up the cash upfront.
However, even if you can afford to cover the cost it's not necessarily the best thing to do. Here are your options:
While the student loans system has been heavily criticised, taking out a student loan is likely to be the cheapest way for most families to fund university.
Here are the pros and cons:
The earliest your child will need to start repaying their student loan is the April after they finish their studies - and that's only if they’ve started earning a certain amount.
This means that neither you or your son or daughter will need to worry about making any repayments while they're at university. They'll also have several months after they graduate to find a job and start earning a decent salary before they have to start paying anything back.
Your child won't have to start paying back their student loan until they're earning over a certain amount. This is to ensure that students who borrow to further their education aren’t saddled with hefty loan repayments that they can’t afford.
For courses starting after September, 2012, the threshold is set at £21,000 - while your child earns less than this they won’t be asked to start repayments.
What's more, once they do become eligible the repayments on your child's student loan will be linked to the amount they earn.
Their repayments will be equal to 9% of their pre-tax earnings over the repayment threshold. So, for example, if they earn £26,000 their repayments would be 9% of £5,000. This equals £450 a year or £37.50 a month.
The link to income also means that should your son or daughter lose their job, decide to go back to university, or take time off for some other reason, they wouldn’t need to continue making student loan repayments until their income goes back up.
If you compare the interest rates charged on student loans to personal loans available on the high street it’s clear that students borrowing costs are relatively low.
New students starting their courses on or after 1st September, 2012 will be charged the following:
While studying = rate of inflation + 3%
Overall this makes the cost of a student loan much cheaper than most private forms of borrowing.
Unlike other types of borrowing, applying for a student loan shouldn’t have any impact on your son or daughter’s credit rating or their ability to borrow in the future.
Student loans aren't currently listed on credit reports so there is no way for future lenders to know if your child has a student loan or how much is outstanding.
Repayments on a student loan will take a slice out of your child’s future earnings for quite a number of years, during which time they might be trying to save for a house deposit or wanting to start a family of their own.
This makes the option of paying tuition fees up front much more appealing.
However, if you have the money to pay tuition fees up front, you might want to consider whether the cash would be better spent in helping your child with graduate expenses, or perhaps contributing towards a house deposit instead.
No parent wants to see their child start their working life in thousands of pounds' worth of debt, even if it's student loan debt.
While ultimately only you can assess the importance of having a student loan “hanging” over your child when they graduate, it’s important to remember that student loan debt is unlike any other type of borrowing and works in many ways like a tax on future earnings rather than as a outstanding lump sum they need to repay.
With savings rates reasonably low at the moment, if you have the cash set aside you may feel that paying your child’s student loan with your savings makes financial sense.
While using savings to pay debts or bills instead of borrowing generally works out cheaper, student loans are often the exception to this rule.
While using your savings to cover tuition fees will mean that your child doesn’t have to foot the bill for their education, it will mean that you miss out on interest earned by your savings.
However, you'd need to earn at least inflation + 3% in interest to make it worthwhile waiting until your child finished their studies before using your savings to clear their debt - otherwise it's likely to be better to stump up the money upfront.
If you do decide to save your son or daughters university fund for a later date you’ll need to ensure you get a good return on your savings while you wait. Try follow our Action Plan: How to grow your savings for help finding the right home for the money.
Even if you’ve purposefully set money aside to help your son or daughter pay for university it's possible your cash may be more useful elsewhere rather than paying tuition fees.
Using the money to help your son or daughter with other university expenses, as a deposit for their first home, or to put towards a car are just some of the alternatives that could make more financial sense than paying for fees.
Taking out a loan yourself rather than having your child apply for a loan through the Student Loans service is unlikely to be the best option.
In fact borrowing to pay your child’s tuition fees should be avoided at all costs because you will pay much more to borrow privately than doing so through the Student Loans system.
Remember, student loans are tied to the rate of inflation so your son or daughter will see the amount they owe raise in line with the cost of living.
If you were to borrow using a personal loan, mortgage advance or credit card it’s likely that you would pay much more than this and your borrowing wouldn’t be linked to your earnings in the same way as a student loan.
Perhaps the only exception to this might be if you and or your son/daughter could borrow the money interest free (potentially using a 0% credit card) – even then the money you used to pay their tuition fees could be put to better use elsewhere.