If you have teenagers who are heading to university and moving out of home for the first time, then it’s important to consider how they’ll pay their way.
After all, there are both tuition fees and living costs to think about, which are unfortunately higher than ever amid the cost of living crisis.
In this article, we explore some of the financial options you and your child might consider when it comes to paying for university.
Bear in mind that the majority of the advice in this guide applies to studying in England specifically.
Should my child get a student loan?
Student loans remain a popular way for students to cover the cost of tuition and living expenses at university, but they have become increasingly divisive in recent years thanks to higher interest rates that make paying them off more daunting. In addition, a spate of new changes to how loans work this year means that you and your child should seriously consider whether taking out a student loan is the best way forward.
The amount that your child will be able to borrow will vary, but student loans are designed to cover the cost of tuition (a maximum of £9,250 a year), plus living costs in the form of a ‘maintenance loan’. The maintenance loan is means-tested, meaning it varies depending on several factors. These include whether your child will live at home or in student accommodation, whether they will be studying in London (where the cost of living is higher) or elsewhere, and your own income. Parents of students are expected to provide information on their income for their previous tax year to the Student Loans Company (SLC) in order to help determine how much your child is entitled to receive.
The higher the household income, the lower your child’s loan entitlement, as it is thought that parents who earn more will be able to help more with living costs. For example, students living away from home and outside London during their university years can receive a minimum of £4,651 a year and a maximum of £9,978 in maintenance loan, but the exact amount is determined by your income level.
Under new ‘Plan 5’ loans, a household income of £25,000 is the threshold at which the loan amount starts to go down, and reduces to the £4,651 minimum at either £62,000 if studying outside London, £70,000 in London, or £58,000 if they stay at home to study.
Changes to student loans in 2023 (Plan 5 loans)
New student loan changes came into effect on the first of August, affecting students starting university this year. While there is a small positive change in the way that interest on loans is calculated, the way that repayments work is changing too, and you and your child should be fully aware of the new rules before deciding to go ahead with a student loan.
New students had to apply for a loan by 19 May 2023 in order to have it ready to go for the beginning of the academic year in September. You can still apply for funding, and can continue to do so up to nine months after your course’s start date, but it will take several weeks for the application to process and the loan to come through.
New undergraduates, as well as those on a Postgraduate Certification of Education (PGCE) or taking out an Advanced Learner Loan, will be on a new loan entitled ‘Plan 5’. This plan includes new rules for how interest is calculated and how the loan is paid back.
How is interest calculated on a Plan 5 loan?
Interest on student loans is linked to the rate of inflation as measured by the Retail Price Index (RPI). Under the last loan system – Plan 2 – interest was calculated as RPI plus three percent during study, and then after your studies, on a sliding scale between just RPI and RPI plus three depending on how much you earned. See below for more information on Plan 2 loans.
Under Plan 5, interest is set at just RPI both during and after study. This means the amount your child owes should increase in line with the cost of goods and services.
How do repayments work on a Plan 5 loan?
Student loans are repaid differently to other forms of debt. If a graduate took out a student loan to help pay for university, then repayments are deducted from their income once their earnings go over a certain threshold. If they are an employee, the amount owed is deducted automatically by their employer at the same time as tax and National Insurance contributions.
Students on Plan 5 won’t be expected to start paying their loan back until the April after they finish their course, and no earlier than April 2026. Like previous loans, repayments start once the student starts earning over a certain threshold on their income – for Plan 5, this is £480 a week, £2,083 a month or £25,000 a year, before tax and other deductions.
Graduates who earn less than this amount won’t have to make any repayments until their earnings pass the threshold. However, the threshold will be adjusted annually by inflation from April 2027.
As on the previous Plan 2, repayments for those on Plan 5 will be made based on what a graduate earns, not the amount they owe. Repayments will be set at 9% of whatever graduates earn above the £25,000 threshold. So, for example, if your child starts university this year and earns £35,000 a year after graduating, their income will be £10,000 over the threshold, and they will have £900 deducted a year from their salary in student loan repayments.
Previous student loans were wiped after 30 years, whether they had been fully repaid or not. For Plan 5 loans, this term is being increased to 40 years, in order to increase the number of fully repaid loans.
So should my child take out a Plan 5 loan?
While the lower interest rate for Plan 5 borrowers is a good thing, the new system will likely see new students’ pockets suffering more than their predecessors’.
Even if someone on Plan 2 has a bigger loan in theory due to interest rates, remember that repayments are made based on earnings above an income threshold – and this threshold is £2,295 lower for a Plan 5 borrower than a Plan 2 borrower. What this effectively means is that someone on Plan 5 will pay more than someone on Plan 2 on the same exact income.
For example, a Plan 2 graduate earning £30,000 a year would be repaying 9% of their income over the £27,295 threshold. That’s 9% of £2,705, so £243.45 a year.
However, a Plan 5 graduate earning the same amount will repay 9% of their income over £25,000. That’s 9% of £5,000, so £450 a year.
This, combined with the hugely extended repayment term before the loan is wiped, means that most Plan 5 borrowers will end up repaying more, for longer.
Make sure that you and your child are fully aware of the new system and how it could affect them in the future before going ahead with applying for a student loan.
What if my child took out a student loan in a previous year?
Someone currently studying or who took out a loan in previous years in England or Wales will most likely be on Plan 2, meaning they will only start to repay their income when they earn more than £524 a week, £2,274 a month or £27,295 a year (before tax and other deductions). The amount that is repaid each month is calculated as 9% of their earnings over the threshold.
Plan 2 student loan debt is also unique as it’s automatically cleared after 30 years, regardless of how much has been paid off. In fact, it is thought that only around 20% of graduates on Plan 2 will end up repaying their student loan debt in full.
Borrowers are able to make extra repayments if they wish to clear their loan faster, but since the debt is eventually cleared, this is not a particularly common choice.
Interest on a Plan 2 loan is calculated as the Retail Price Index (RPI) plus 3%. Once your child leaves university and starts earning themselves, their income level will be used to calculate how much they’ll pay. The rate may range from just the RPI (if your child earns £27,295 or less) to RPI plus 3% (if they earn over £49,130). If they earn from £27,295 to £49,130, then they will pay RPI plus an extra percentage up to 3%.
Bear in mind that the RPI used for this calculation is not based on the current figure, but uses the RPI from the previous March, and resets every September. However, the Department for Education (DfE) has been maintaining an interest cap on Plan 2 loans in order to prevent it from exceeding the average commercial interest rate, which they review every three months. Currently, the cap is set at 7.1% until August. Otherwise, Plan 2 students would currently be sitting on a massive 12% interest rate, given RPI was at 9% in March 2022.
Should I help my child financially during university?
If you’re in a position where you can afford to help your child financially through university, this may be an option to consider. The Student Loan Company (SLC) tends to assume that parents on higher incomes will assist their children financially throughout university, which is why they offer smaller loans in this scenario. However, you may wish for your child to forego a student loan entirely, particularly in light of this year’s changes.
You may choose to help your children financially without expecting them to repay the money, or you could provide a loan with the expectation that they will be able to pay you back at some point. You could even set your own particular loan terms. The advantage of this option is that you will get your money back and your child won’t have to pay substantial interest on their debt.
Alternatively, you may decide to help fund a particular part of your child’s costs, such as living costs, while they pay for the rest themselves with a loan or part-time work.
Some parents who can afford to do so choose to buy their child a house or flat as a way to give them a leg-up onto the property ladder. If you’re considering doing this, read our article Should I buy a property for my student child? for more information.
Should my child get a part-time job during university?
One common option to cover some costs is for students to get a part-time job at university. Cafes and restaurants on campus or owned by the university tend to mainly employ students, for example. The university’s website may have a page to help students find part-time work at one of their locations.
However, whether this option is possible will depend on the kind of course your child is taking. For example, if they are taking a particularly intensive course with lots of lectures, tutorials and seminars and work to do, it might prove difficult for them to balance this load with a job. Make sure your child is aware of their schedule and what is expected of them from their course before encouraging them to seek part-time work at university.
Can my child study from home?
Since the pandemic, a growing number of students are choosing to live at home during their university years, to either study at a nearby university or via an online course. This reduces the amount that they can borrow as a maintenance loan, but receiving a smaller amount isn’t necessarily a bad thing, as they will not have rent and bills to pay (unless you wish to charge these yourself).
If your child is considering living at home during their studies, make sure you are all comfortable with this decision and have thought it through. For many students, being able to move away from home for university is part of the experience and an important step in building both personal and financial independence.