- A-Level results come out on 13 August, prompting prospective university students to consider the financial implications of higher education
- Full-time students starting university last September were forecast to borrow £45,190 in student loans on average over the course of their studies (source: Student loan forecasts for England – 2025/26 | GOV.UK)
- Over half (55%) of them are expected to repay the student loan plus interest in full
- There are three ways to pay, and one of them comes with a handy upside
Sarah Coles, head of personal finance at AJ Bell, comments:
“A university degree might be worth a great deal to graduates, but it costs them a fortune too. Students are expected to borrow more than £45,000 on average over the course of their studies, while their parents are also often expected to contribute handsomely.
“There are broadly three ways to meet this horrible bill, and many people will use all three. Fortunately, one of them has a useful upside.”
- Students borrow and repay
“For students starting university in England this year, standard full-time course fees are increasing up to £9,790 a year. Most will pay these using a tuition fee loan – which goes straight to the university. On top of this, they can get a maintenance loan, which depends on their circumstances. This ranges between £4,013 and £14,135 a year, depending on household income and whether students live away from their parents or are studying in London. Most of this will need to be repaid in full.
“The good news is that repayments are fixed, so although the debts are enormous, the monthly payments aren’t quite as bad as you might expect. New students in England, and English students studying elsewhere in the UK, will have to repay 9% of their income over £25,000, while the rules on costs, loans and repayments vary significantly across the UK. So, for example, in Wales, Scotland and Northern Ireland repayments begin when earnings hit £29,385, £33,795 and £26,900 respectively. Those on lower incomes won’t have to pay anything until they cross the threshold. For someone earning £35,000 a year, repayments in England would be £75 a month.
“The downside is that most graduates will be making these payments for decades, and middle earners will be repaying them for the longest. Throughout this time, the interest will roll up, so they’ll end up repaying far more than they borrowed. While it won’t be considered alongside their other debts when they apply for a mortgage, the monthly payments will factor into the affordability calculations, which could make it harder to get onto the property ladder.
“And it doesn’t stop here. Students face typical living costs of between £1,000 and £1,500 a month, so even with a full maintenance loan there may be a shortfall. On top of the loans, students will often work alongside their studies to cover the gap.”
- Parents step in to close the gap
“In lots of cases, even with a loan and a part time job, parents will have to cover some of the monthly costs. If they only qualify for the smallest maintenance loan, it could mean having to find £10,000 a year or more to support their offspring. Those who are committed to covering all the costs, so their children don’t take out any student loans at all, could end up facing an annual cost of £25,000 once tuition fees and maintenance are all included.
“It’s why anyone who thinks there’s a chance their child might go to university should start planning for it as early as possible. One popular home for this money is a Junior ISA, where you can invest up to £9,000 for each child every year. It will grow tax free until they’re 18, and with such a long time horizon, there’s an opportunity for investment growth to make a real difference.
“If parents haven’t had a chance to save or invest, the options are less positive. They may feel compelled to dip into the equity in their home, use tax-free cash from their pension, or make difficult sacrifices in other areas of their spending in order to close the gap. These can have far-reaching consequences for the rest of their life.”
- The opportunity for grandparents
“To protect students and their parents from a horrible financial hangover after graduation, there’s a third option. If grandparents have the available funds, they may be able to step in and offer support. If they’re worried about potentially having an inheritance tax bill – especially once pensions are dragged into the inheritance tax net from next April, then they could kill two birds with one stone by making gifts.
“There are gifts anyone can give every tax year that fall out of your estate immediately for inheritance tax purposes. The ‘annual exemption’ lets you give away a total of £3,000 each year. You can also bring forward any unused annual exemption for one year, doubling the total to £6,000. If there are still a few years until the grandchild goes to university, there’s the opportunity to build a nest egg gradually. If this money is paid into a Junior ISA, it will leave the estate immediately, but the child won’t be able to spend it until they reach the age of 18.
“If they want to make bigger gifts over a shorter time, grandparents can hand over a lump sum as a ‘potentially exempt transfer’. This will fall out of their estate after seven years. Alternatively, if they have more income than they need to live on, they can make unlimited gifts from income that will be free of IHT, as long as they can show the gifts form part of their regular expenditure and that they don’t reduce their standard of living. Income includes earnings, pension income, investment income and interest from savings. They’ll also need to keep records to prove this is what they’re doing.
“Making these gifts can be life-changing for your family if you can spare the money. However, it’s vital not to give away anything you can’t afford to part with. It doesn’t benefit anyone if your efforts to protect your family from the cost of university mean they end up having to support you in the long run. Finding the right balance is key.”
