Student loan changes – supporting your child

Changes to student loan repayments could make it even more important to have a solid financial plan in place for funding your child or grandchild’s university education.

The changes, which come into effect from September 2023, could add to the financial pressures that many of today’s young people already face. Here, we explain the impact of the changes, and how you can make a difference to your child’s future financial security.

A guide to paying for school and university fees

Find out how early planning and investing could help you pay for a child’s education.

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Student loan changes explained

Currently, graduates in England begin paying back their student loans once they earn more than £27,295 a year. Any outstanding debt is written off 30 years after they start repayments. For those starting courses from September 2023, the salary threshold at which they start repaying loans will fall to £25,000 and the repayment term will be extended to 40 years¹. The interest rate on loans will reduce by up to three percentage points.

The plans mean that the proportion of graduates who are expected to repay their loans in full will rise from around a quarter to 70%, according to the Institute for Fiscal Studies². Its analysis suggests graduates with “below average but not the lowest” earnings (third and fourth decile of earnings) stand to lose the most, at around £28,000. This is because in many cases they won’t pay off their student loans, but will make repayments for ten years longer and on a larger chunk of their earnings than under the current system. Meanwhile, the highest earners would gain £25,000 on average because of the lower interest rate.

The changes make it even more important to consider the best way of funding your child’s university education. For some families, student loans might still be the best course of action, whereas others may wish to pay for university out of savings. The approach that’s right for you will largely depend on your financial circumstances, but the first step is to understand how much university really costs.

True cost of university

Tuition fees in England, Wales and Northern Ireland currently cost up to £9,2501 per year, or £27,750 for a three-year course. For those who live in Scotland and go to university in Scotland, fees are £1,820 a year, but these are usually covered by Student Awards Agency Scotland (SAAS)³.

Additional expenses to consider include rent, bills, groceries, transport, going out, and course materials. In total, a typical UK student can expect to pay around £920 per month on living costs⁴. Assuming your child pays these costs for nine months of the year, this would add up to just under £25,000 for a three-year course or just over £33,000 for a four-year course (undergraduate degrees are typically three years, except in Scotland where they are usually four years).

Depending on where your child goes to university, you could be looking at a total figure of around £53,000 – and that’s in today’s money. For families planning ahead, this figure could be more than £70,000 in 15 years’ time, assuming an inflation rate of 2% per annum.

Building a solid plan

If you wish to pay for your child or grandchild’s university education out of existing savings, make sure you understand how this could affect your own finances, both now and in the future. A financial adviser can give you a clear picture of the likely impact that paying for university would have on your future savings, as well as your income in retirement. This will help you decide whether it is affordable, and how to avoid neglecting your other financial goals.

If your children are younger, another option is to set up a regular savings plan and build up money over time. For children due to go to university in a few years’ time, some fixed-term savings accounts are currently offering attractive interest rates.

If, however, your children won’t be going to university for ten years or so, you may wish to consider investing a portion of your money in the stock market. Although the stock market is volatile, history shows that over periods of ten or more years it tends to perform more strongly than cash, thereby boosting your chances of making a valuable contribution towards your child’s university education.

If, for example, you invested £320 a month over 15 years, you could build up a pot worth just over £73,000, assuming an annual return of 3% after inflation and charges. This could cover three years’ worth of tuition fees in England, Wales or Northern Ireland, plus living costs, in 15 years’ time.

Next steps

Understanding how to pay for your child or grandchild’s university education isn’t always straightforward, and this is where getting some smart advice can help. At RBC Brewin Dolphin, we’ll assess your personal and financial circumstances, and create a financial plan that suits the needs of both you and your family. This will help you feel more confident that you’re building a secure financial future for your children or grandchildren while remaining on track to meet your own goals.

¹ https://www.gov.uk/government/news/fairer-higher-education-system-for-students-and-taxpayers
² https://ifs.org.uk/articles/sweeping-changes-student-loans-hit-tomorrows-lower-earning-graduates
³ https://www.thecompleteuniversityguide.co.uk/student-advice/finance/university-tuition-fees-and-financial-support-in-scotland
⁴ https://www.savethestudent.org/money/student-budgeting/what-do-students-spend-their-money-on.html

The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.