Last week I decided to investigate whether and how to repay my kids student loans. What I discovered made my blood boil. For a start my daughter has a loan which is more than twice that of my son’s. He has a loan of £28,000 and has repaid about £8,000 and my daughter has a loan of £63,000 and just started work. This is unfair.
Secondly to decide what to do, needs a crystal ball to look into the future – Will my daughter want to give up work to care for a family, will my son die young, will either or both want to work in a less paid job such as a charity worker?
I asked both children what their plans were for the next 30 years – they have both started well – but none of us can foresee the future, there are so many imponderables!
One thing that is certain, is that student loans should either be paid in full or not at all but not in chunks – and here is why…
The first thing to understand is that a Student Loan is not a loan – because after thirty years from drawdown it is written off – which could be good or bad depending on how much the graduate earns for the next thirty years after graduating.
The second thing to understand is that although it is collected by the employer it is not a tax – it is a contract. This means that if the graduate decides to work for ten years abroad, he or she is still liable to repay the student loan. Although there could be issues of enforcement since it cannot be collected through the employer, it is still due and graduates living abroad will be pursued!
The third thing to remember is that the graduate will pay more if he or she earns more – the amount is 9% on any income earned above £27,295 regardless of how much monies are outstanding on the loan – this is why the loan should never be paid in chunks because the repayments do not go down as the loan decreases.
This means that if the graduate inherits some money, or a relative wants to assist financially, but the ‘loan’ cannot be repaid in full, the graduate would be better off investing the monies until such time as the entire amount can be repaid – but this is not totally satisfactory because the investment will itself attract tax and be added as extra income on which the monthly repayment amounts are calculated.
The fourth thing to remember is that the interest rate which is added every month to the loan since the date of drawdown is the retail price index (RPI), and if above £27,295 the rate increases from the RPI to a maximum of 3% added to the RPI on earnings up to earnings of £49,130.
If the RPI is at 2.5% the rate of interest which is added to the loan per annum is 5.5%. This means that if the graduate has an income above £27,295 but does not have enough income to repay his entire loan in thirty years, he or she could be paying as much as three times the cost of the original education due to the addition to the loan of the interest.
We know that economists are predicting rising inflation which means that it is likely the loan will increase as inflation goes up..
The fifth thing to factor in, is if a grandparent is considering repaying the student loan this repayment is a gift to the graduate and if the grandparent fails to survive 7 years the repayment amount will attract Inheritance Tax at up to 40% which further increases the cost.
Of course, if a parent wishes to repay their kids student loan there is a relief from Inheritance Tax for gifts out of income. If the parent is in the fortunate position of having sufficient income to pay off student loans out of annual income then they should do so, because they do not then need to survive 7 years for the gift to fall out of inheritance tax.
As a Fellow of the Chartered Institute of Taxation and having spent several decades observing tax changes and human behaviour, I am staggered not to see more outrage at what is, for many graduates, deductions of more than 50% out of their income. This together with higher rates of taxation and national insurance, prospective rises of corporation tax rates and talk of reducing the £27,295 threshold at which the graduate starts to repay their loan to £23,000 taxation is a massive disincentive for any graduate to do well.
If I were a graduate wanting to do well, start a family and find a home – I would not be inclined to vote Tory, I would look around for a party which provided an incentive to work and do well, to encourage our students to study and give back to the country rather than demonstrating that to do well comes at a cost of deductions in excess of 50% and an incentive to employers not to employ rising stars because they need to earn so much more to keep what they need to start a family and find a home, when the cost of corporate taxation means there is less to go around.
It is simply not fair and makes my blood boil.
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