Thursday, 17 March 2011

Student Loan - More Like a Student Tax! (UK)

Having teenagers, who will hopefully progress in their studies to University, means that the costs of fees and living expenses for them is part of my overall DIY Income Investor expenditure plan for the future.

However, the current Student Loan proposals make me mad! What was quite a fairly generous 'loan' has morphed into a huge - potentially life-long - tax, with possibly penalties for paying back the loan early! So not only do the students (and parents) have to pay higher fees but they also get taxed to do it. This is a long way from when the government actually paid you to go to University with a grant!

As today's This is Money article reports: some graduates may have to pay back twice the amount of their loan. The loan covering fees and living expenses and does not have to be paid back until the (hopefully successful) graduate is working for a reasonable salary. However, interest is building up all the time (the reverse of the virtuous Money Snowball) - and because students can only repay a limited amount each year (a bit like an out-of-control credit card debt) the meter keeps on ticking.

What action should the DIY Income Investor take? Well, because you will have built up savings and investments, you have a simple option: don't let your son or daughter take out one of these iniquitous loans - lend them the money yourself.

Take early steps

It could be quite a 'hit' on your finances, so you will need to build the cost into your calculations as soon as possible.

There are other practical steps you can take:
  • open a savings account for your child as early as possible and put any presents of money to the child in there: as long as the money does not come from the child's parents, there will be not tax liability (keep any accompanying letters to prove this to the tax authorities)
  • explain to your child how to live cheaply as a student (mainly by setting a good example as a DIY Income Investor)
  • teach your child how to operate a bank account without going overdrawn
  • encourage the prospective student to take a 'gap' year, part of which will need to be earning and saving for Uni
  • encourage the student to work part-time at Uni to help cover living costs
  • suggest to grandparents that they contribute to the 'family' loan - they can each may a gift of £3,000 each year without  attracting any potential Inheritance Tax liability

At University

When your son or daughter is at University, they may also need a bit of financial coaching - as the tendency may be to spend and spend. One practical way may be for you to provide them with an Internet bank account that you have access to - putting money in, when necessary but also allowing you to monitor their spending.

After University

After their studies, you may well encourage your offspring to repay some or all of the loan (if they are allowed to!). You might consider then putting the repayments into some additional savings for their future - helping them to become a DIY Income Investor in due course.

Update - I have subsequently published a Student Loan Repayment Calculator, so you can see how much has to be repaid.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.