The threshold for repaying student loans in England and Wales, which determines the amount of money a graduate can earn annually before they must begin repaying their university loans, has been frozen at £25,000 until the 2027 tax year.
This applies to ‘Plan 5’ students who started their course from the 2023 academic year onwards. With fewer international students and good A-level results, more UK students are going to university, so this threshold freeze will impact even more people.
Here’s a quick summary of student loan repayments for new students and how parents can help.
Current student loan repayment rules
Students don’t become liable for loan repayments until the April after their graduation. As most university courses last for 3 years, students starting in September 2024 won’t begin repaying their loans until April 2028 at the earliest.
Rather than increasing the threshold to reflect inflation or wages, freezing it at £25,000 a year (£2,083 a month) means that more graduates will begin repaying earlier than they might have if the repayment threshold was increased.
For earnings above the threshold, repayments are taken at 9% of the excess, with interest accrued from the first day of taking the loan and a potential term of up to 40 years.
After 2027, the government may decide to increase the student loan repayment threshold to be in line with inflation, but this will still result in a few years of fiscal drag.
Is it worth self-funding university fees?
Wealthier families may consider self-funding their children’s university tuition fees and living costs themselves, but it’s not so straightforward, as normal debt rules don’t apply to student loans.
If a parent paid the full cost of their child’s university education at around £60,000, but their child never earns more than the much lower repayment threshold during the repayment term, then self-funding will have been an expensive mistake.
Of course, it’s difficult to estimate earnings up to 4 decades in the future, so it’s hard to know whether self-funding will be worth it unless you’re sure your child will go into a high-earning career.
The compromise could be for the child to receive the full student loan, then for the parents to look into paying off the loan early after their child graduates if they get a high-paying job.
However, the pros and cons of this very much depend on personal circumstances.
Official guidance on repaying student loans is available on the government website, or it can help to consult a financial adviser to assess which route would be most salient in your case.
If you would like to speak to our accountants in Barnsley about your family finances and financial planning for your child’s future, please contact gbac by calling 01226 298 298, or send an email to info@gbac.co.uk and we’ll be in touch soon.