Having children is expensive, and even when your offspring are starting to make their way in the world, the expenses don’t stop.
A generation ago, going off to university meant the financial demands were starting to ease. These days, with every year of further education adding another £10,000 or so to student debt things are not so simple.
Helping out with the costs of education has become accepted by many parents as inevitable. But should the bank of mum and dad really help pay off that student loan or would it be better to concentrate on the next big financial burden – getting on the housing ladder?
It’s only natural to want to give your children a good start in life. What’s the best way to give them a financial leg up?
Clearing the debt
It’s usually a good idea to clear debt before any other kind of financial commitment, but student loans may be a special case. When students graduate and start earning, they have to repay their loans when their wages exceed a threshold – currently £21,000. Interest is added at a rate linked both to their wage and inflation. If after 30 years there is still a balance outstanding, it is written off.
But make no mistake, they are still a very serious burden. A student borrowing £15,000 a year for three years to cover tuition and living expenses will leave education with a £45,000 debt. According to some analysts they could mean lifetime payments of £100,000 or more.
There is evidence that the prospect of this kind of debt is putting some young people off the idea of further education altogether. But although a lifetime in debt sounds frightening, education is still a good investment. According to the Department for Business Innovation & Skills, the salary for 21-30 year-old graduates is £23,500, compared to £18,000 for non-graduates in the same age range. The differential can widen as years go by and careers develop.
But even then, the student loan will take years to pay off. And payments on the debt will be taken into account by mortgage providers. Graduates will need those extra earnings, and more, to get a decent mortgage.
The student loan trap
The student loan can be a trap, making it impossible for your children to take the next step in life – getting on the housing ladder. Many people in their thirties are still living in the parental home as a result. The younger generation want a home of their own, while parents probably want theirs back.
Of course, they can rent. But the longer your children rent for, the more money they are throwing away.
Not only is money spent on rent essentially money wasted, current low interest rates mean that a mortgage is likely to be much cheaper than rent. Owning a home, an appreciating asset is part of establishing financial security. And although the housing market can fall over the short term, the shortage of housing stock and demand that outstrips supply leaves most analysts predicting continued price growth. Delaying may only make things more expensive.
With the average price paid by first time buyers across the UK now £190,180, deposits of £33,0000 are becoming the norm.
Providing a cash lump sum towards the deposit is the usual answer for most parents, and of course, having a higher deposit can help secure much more favourable mortgage terms.
Your offspring will probably need help to pay off their student loan – and still need to call on the bank of Mum and Dad to get that mortgage deposit.
How you can help
Being saddled with huge debt with terms that could change, and which could restrict choices in life is a major argument for avoiding student loans altogether.
The solution? In an ideal world, saving before your son or daughter goes to college. With a lump sum, they could avoid the student debt trap altogether. With less or no student loan payments, to make, saving for that deposit becomes a great deal easier
Start early, and building up the kind of lump sum you need to give your children a really good start in life is much easier. Avoid the student loan trap or busy that first home. Or even do both.
Click here to read our recent blog “Making a Will”
Remember your home may be at risk if you do not keep up with the repayments for a
loan or mortgage secured on your property.