At this time of year, as summer university terms come to an end, I am frequently asked the same question by clients: “Should we pay off our children’s student loans?” As the mother of a graduate with one of the iniquitous Plan 2 loans, I am wondering the same thing.
The reality of repayments over time
My son, who graduated in 2017, borrowed £37,654. He has been paying 9 per cent of his salary above the threshold since 2018 – nearly £12,000 to date – but the heinous interest rate of RPI plus 3 per cent means the loan now stands at £45,500. In his current role, he will end up paying a further £50,000 in today’s money by the end of the loan period – and he still will not have paid it off.
Much of the unhappiness is over the frozen threshold at which repayments start. The Conservatives froze it for three years, and now Rachel Reeves wants to do the same – at £29,385 from April next year.
Since the Plan 2 scheme was introduced, the threshold has fallen relative to average wages. The National Living Wage for adults has risen by a third in the past four years. Had the graduate repayment threshold risen in line, it would be £36,500 by April next year.
The RPI inflation measure represents a further blow. Anyone with solar panels will know that from April the feed-in tariff that was indexed against RPI was moved to the lower inflation measure of CPI to save the government cash. This is not scheduled to happen for student loans for another five years.
Paying it off vs letting it run its course
So should we pay off my son’s debt today? I have crunched through spreadsheet after spreadsheet and given a lot of thought to the implications for us and other families. Here is my thinking.
The key question is not whether my son will pay off the loan. Lots of people will not fulfil their repayment obligations if, for instance, they have a low-paid job, do not work much, are ill or take time off work for childcare.
More important is to ask whether, in today’s money, my son will end up paying more than what we would pay to write off the bill today. As things stand, by our calculations, he likely will.
A heavier burden for master’s graduates
I am glad my son did not undertake a master’s degree after he graduated. Those who did have to pay for this loan at the same time as making their undergraduate loan payments, paying an additional 6 per cent of salary over £21,000 on a balance that rises at RPI plus 3 per cent. In my view, this is an even bigger scandal.
For those master’s graduates whose salary reaches £100,000, that means a marginal rate of tax of 77 per cent! For parents of graduates with a master’s degree, if you can pay off only one loan, prioritise this.
Could future reforms change the picture?
Parents are in a real dilemma here. They could write off a loan and get rid of the weight and hassle. However, such is the growing sense of outrage at the situation many graduates find themselves in, they would do so knowing that the government may be forced to retreat.
Gifting during study vs after graduation
If your children are still studying, there are some inheritance tax (IHT) benefits to consider. Paying this will not trigger the seven-year gifting rule, as there is an exemption for family maintenance while the child is in full-time study. The exemption does not apply to grandparents, but regular gifts out of income are currently IHT-free if you can show that giving them will have no effect on your standard of living.
If your children have already graduated, any lump sum payments will probably trigger the seven-year rule. So you might want to get on with it. Several of our clients are considering using their tax-free lump sum from their pension to pay off the debt.
Is paying off the loan the best use of funds?
The next dilemma is whether it is actually a good idea to use that money to pay off the student loan. Might it be put to another purpose entirely?
Imagine that two years after graduating a couple have saved £20,000 to buy a starter home for £320,000. Over a 30-year term (matching that of the Plan 2 student loan) they might realistically pay 5 per cent to borrow £300,000. The monthly repayment is £1,611.
If they use that student loan money as a deposit instead – say, £60,000 – the loan-to-value ratio of the mortgage improves, from 94 to 75 per cent. Now they might access deals for 4.2 per cent and the monthly mortgage repayment shrinks to £1,173, saving them £438 a month in the first years of their mortgage. Your gift may enable an early house move, saving them thousands in wasted rent.
Keeping options open while the landscape evolves
If IHT is a consideration, you might want to get on with making the gift, investing it until the picture becomes clearer on repayments. A high-interest account will leave options open, but note that if unearned taxable income exceeds £2,000 it will all be included as income for debt repayments – so use ISA wrappers where possible.
With pressure for political action mounting, a Treasury Committee inquiry into student loans is now finally under way. Much-needed new measures may follow. Even so, many grandparents and grandparents – me included – really ought to factor these considerations into their financial planning as soon as they possibly can.
*Featured on the Financial Times website on 20th June 2026: Should I pay off my child’s student loans?
Clare Munro is our Senior Tax Adviser. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.
What you need to know
This article does not constitute advice. Tax laws are subject to change and taxation will vary depending on individual circumstances.