Many people will have come across the headline-grabbing interest rate of 5.6% per annum on some student loans. Many people rightly believe that we should pay off all our debts where possible and should never take out a loan that we know we cannot repay. However, with the average starting salary of graduates stagnant at £30,000 for a fifth consecutive year, and the average debt of recent graduates reaching £40,280 it is no surprise that many recent graduates view their loans more as an ‘education tax’ than a viable repayment vehicle.
It is understandable then those grandparents are keen to help their grandchildren out when it comes to settling this debt.
Student loans, however, are very different from traditional bank loans, and sometimes it can be more beneficial to give your grandchild the money directly to help them with their future.
Plan 1 or 2?
Broadly, if they started their undergraduate course before 1 September 2012, they will probably be on Plan 1. If they started after this date, they are likely to be on Plan 2. If you are reading this article and considering whether to pay off your grandchild’s debt, it is safe to assume their loan will be assessable to Plan 2 but it is always worth double-checking
Student loans are far from straightforward and very few people will ever end up paying the top rate of interest on their loan. Before you settle your grandchild’s debt, there are some key things to bear in mind:
- A student loan does not work like a conventional loan.
- Students start repaying it once they are earning above the threshold – this is £26,568 for this tax year if on Plan 2.
- If they do not manage to clear it during the loan period, the balance is written off – usually 30 years.
