Should I pay off my child's or grandchild’s student loan?

University fees in the UK vary depending on where you’re from and where you study. For the 2024/25 academic year, the fees are as follows:

• England – £9,250 for all students
• Wales – £9,250 for all students
• Northern Ireland – £4,750 for Northern Irish students and £9,250 for other UK students
• Scotland – free for most Scottish students, and £9,250 for other UK students

So, for a three-year undergraduate course in England, most students will pay £27,750 for their tuition.

The fees can be considerably higher for international students.

Most students get a loan from Student Finance to fund their undergraduate tuition. Then, once they start earning a certain level of income, a portion of their income is used to repay their student debt.

In England, the income threshold for undergraduates is currently between £24,990 and £27,295 depending on when they received their first Student Finance loan.

For undergraduates, once they start earning above the threshold of their loan plan, they will pay 9% of their annual salary above the threshold.

For example, graduates on Plan 5 start repaying their loan once they earn above £25,000. So, a graduate on Plan 5 with a salary of £30,000 would pay 9% of £5,000 a year, which is £450, or around £38 a month.

Postgraduate thresholds and repayment rates are slightly different. It is also important to note that the repayment rules can change.

In addition to their university fees, most students also take out a Maintenance Loan to contribute towards accommodation costs and basic living expenses.

The size of Maintenance Loans varies, but they are capped at a certain limit depending on where the student is studying and what their living situation is. These loans are also means-tested based on the student’s household income.

For the 2024/25 academic year, students studying at an English university can borrow between the following amounts depending on their household income:

• £3,790 to £8,610 if they’re living at home
• £4,767 to £10,227 if they’re living away from home, outside of London
• £6,647 to £13,348 if they’re living away from home, in London.

This means that a student living away from home and studying a three-year undergraduate course in London could theoretically graduate with a debt of more than £67,000.

Paying off debts generally seems like a wise decision. However, student loans differ from other types of debt.

Students repay their loans based on a percentage of their income once it exceeds a certain threshold, meaning higher earnings result in higher payments.

Additionally, any remaining debt is forgiven after a certain period – the exact length of which depends on which plan they are on – or if the student dies or can no longer work due to disability. This means that many students may only pay back a portion of their loan rather than the full amount.

Indeed, the government forecasts that around 65% of full-time undergraduates starting in 2023/24 will repay their loans in full. This is more than double the forecast for the 2022/23 cohort (27%) because of reforms to student loan repayments.

You should also be mindful that if you pay off your child or grandchild’s debt, your estate may be liable for inheritance tax (IHT) on the money if you die within seven years of gifting it to them, as it could qualify as a potentially exempt transfer (PET). You can read more about this in our previous article Gifting money to grandchildren.

Consequently, paying off your child or grandchild’s student debt in full might end up costing you (or them!) more than they would have paid themselves. So, it may be more beneficial to use the funds for another purpose.

Nonetheless, there are clear benefits to helping a young person begin their career without the weight of student debt. It frees them from the immediate obligation of monthly payments when they secure a job, enabling them to focus on saving for other milestones like buying their first house.

Additionally, by eliminating the debt early, you help prevent interest from accumulating. So, if they do eventually earn a high salary, your child or grandchild won’t end up repaying more than they originally borrowed.

Given the differences between student loans and other types of debt, there may be more financially advantageous ways to support your child or grandchild than simply paying off their loan. This is particularly true at the beginning of their careers when they are likely to be earning less, saving less, and repaying only a small portion (if any) of their student loan.

For example, helping them put a deposit down on a property could offer more immediate and lasting financial security. Homeownership can provide stability, potential appreciation in property value, and the ability to build equity over time, all of which can contribute to a stronger financial foundation.

Alternatively, providing financial assistance to help them start a business could also be valuable. Investing in their business venture not only offers the potential for significant long-term returns but also empowers them to pursue their passions and build a career on their own terms.

These types of support may have a more profound impact than merely reducing their student loan balance, particularly when the loan repayment terms are income-based and the debt may be forgiven after a certain period.

In each instance, the money you gift could qualify as a PET, so it’s important to ensure your child or grandchild is aware of the potential tax liabilities if you pass away within seven years of making the gift.