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Graduating from university is a fantastic time for any young person but unfortunately graduates are facing a bigger debt burden than ever before. Students in England and Wales, who started university after 2012, face a daunting 6.1% interest rate on their loans. This means the average debt per student has risen to £50,800, giving many young people a considerable burden before they even enter full time employment.

At Equilibrium, many clients will get in touch to ask how they can help with their children’s outstanding student loan to the government, either by a lump sum or regular overpayments. However, there are two questions that we ask;

  1. Will it actually make a difference?
  2. What is it they are actually trying to achieve?

When it comes to this government debt there are a few characteristics of the loan structure that need to be acknowledged first;

  • The amount you owe will have no impact on the amount you repay. Regardless of the interest rate accruing on the loan, the amount that is repaid each year is fixed at 9% of the graduate’s earnings above £21,000.
  • The loan is written off after 30 years regardless of whether you have repaid all but a £1 or never paid a penny.
  • And finally, and this one is important, any overpayments made are applied to the outstanding balance so will only potentially reduce the term of the loan not the monthly repayments.

 

So in answer to question one, unless the repayment is large enough to impact the loan to a point where it can be cleared within the 30 years, you’ll simply be throwing money away. Having this ‘end-game’ to the loan is definitely enough reason to pause before contributing large amounts of cash to it.

More relevant is question two. What is it the client is actually trying to achieve? More often than not, they are trying to improve their children’s standard of living and give them more financial confidence.

Very admirable, but making overpayments to their child’s Government loan simply brings forward the point at which the loan is repaid. It won’t have any effect on the amount their child repays each pay day in the meantime. Depending on the size of the overpayment, by the time their child will actually receive any benefit from the overpayment they could be in their late 30’s or early 40’s when they are hopefully a bit financially firmer on their feet.

And so, the question remains, what impact are clients are trying to achieve? Would their children benefit more from the money now, during their 20’s, when they are faced with a time of stagnant real wage growth, rising costs and a daunting housing market? These are very important considerations to keep in mind. While wanting to assist with a child's debt burden is admirable, it is worth checking exactly what the terms of the government debt are as any additional cash contributed to this could be money down the drain.

 

The information provided through the Equilibrium website is based on our opinion and is for general information purposes only. It is not, and should not be construed as financial advice. If you are struggling with debt or require debt advice, please contact the following organisations, who are able to offer free, impartial advice on how to tackle debts: