It would be wrong to suggest that we have a typical client. Every one of our clients is unique with their own individual concerns, aspirations and financial position. However, it would be fair to say, that a reasonable percentage of our clients are the parents of children who may just about be coming to the end of their secondary education. A level exams are done and now the waiting begins. Results are not due until August and with that comes the biggest cross roads that we and our children will have to face: further education, apprenticeships, a gap year or straight off into the world of work?
I’m sure that somewhere in the conversation over the next few weeks, the subject of finance and student loans will pop up.
As of September, the new interest rate for student loans will be 6.1%. Interest is accrued from Day 1 and the average student debt is over £50,000. I’m a parent of sixth formers. My first loan at their age was for £300 for a second hand car, not £50,000. Our graduates can expect to come out of university with a life changing loan that will require repayment over a large part of their working lives. Thankfully, current rules ensure that any remaining debt is written off at the age of 50.
For those inclined to help (because we realise that some parents will take the view that dealing with this level of debt is character building) there are a few options available.
You could write a cheque and make the debt disappear and that would be fantastically generous of you – but not everybody is in a position to write £50,000 cheques – even when they access their pension pots. You’ve worked hard to build up your nest egg, retirement is imminent and you had plans for travelling or new leisure activities – in your mind, you had already spent that money whilst your children were still coping with algebra and The Tudors.
You could remortgage your home. Interest rates are considerably lower than the 6.1% levied on student loans, but virtually all lenders require a repayment date that does not exceed the normal State Retirement Age. In most cases, that could mean a relatively short mortgage term and that could push the monthly repayments up to quite a high level. This could lead to your own cash flow problems at a time when you might be focussed on your own retirement planning and saving as much as possible for the day when you will want to stop work.
You could downsize. After all, you are ‘empty nesters’ but you love your home, filled with memories and close to friends and family, and anyway, where will the kids stay if they come to visit?
For those who may have initially focussed on establishing their own careers before starting a family, you may be old enough to consider equity release as a possibility. Interest rates are still lower than the 6.1% student loan rate. There are no monthly repayments as interest is simply added to the loan and eventually repaid on death or if you choose to downsize or need to move to a care home in later life. There is also the advantage that equity release creates a debt against your estate that will have a beneficial effect on reducing the inheritance tax liability levied on your estate on death.
This last option is worth exploring if you are over 60 years old when your children graduate. You would be helping them out financially without increasing your monthly costs or eating into pension funds or any other savings. By giving money at an earlier age, you would potentially be creating some inheritance tax saving and after all, when the time comes and your children are still paying off student loans, it would only rub salt into the wounds if a large part of your estate was paid in inheritance tax when it could have been used to pay off your children’s student loan.
And one last benefit for those parents who are concerned that ‘the kids may come back home and never leave’. When applying for a mortgage, student debts have to be declared and this can substantially reduce the amount of money you can borrow.
We wish all of you and your children future success for results day.
If you would like more information on the above article or advice on your personal financial circumstances, please contact us >>