Students across the country have flocked to newer events, enthusiastically embracing what will be one of the best times of their lives.
And so they should be, after the terrible reduction in university life during the Covid years.
Meanwhile, those parents who have accumulated a little wealth have an important financial consideration to consider.
It’s a roulette decision like no other I can think of in the financial services space: Do you pay for your child’s cost of living? Should you even offer to pay the fees?
It’s something I wonder about now that my son is going to college this week.
Parent Roulette: If you have the money, should you help finance your child’s college or let them go into debt for 40 years?
For some, tough love is instinct: pay up and fend for yourself!
Others may feel inclined to do more, particularly those grateful to have belonged to a fortunate generation in which fees were paid and grants were common.
I expect that those who view family finances holistically and as something to be ruthlessly optimized will fall into the latter camp and will have already been crunching the numbers, as I have.
I’ve been looking carefully and have come to the conclusion that making student loan decisions disrupts the usual financial rules.
Most obviously, rule number 1 (always borrow at the cheapest rates) may not apply.
Making a wise and informed decision requires the skills of an actuary, a political analyst, and a clairvoyant.
Because? Because the existing safety nets for student loans result in wildly different outcomes for each borrower. And because politics could dramatically alter what happens to the entire system.
Most of us will now know how the system works. University fees are capped at £9,250 a year in England for most courses (as different rules apply in Scotland and Wales, we focus on England for now).
Students borrow from the government’s Student Loans Company for this – at a variable rate starting at 7.3 per cent this year – and do not need to start repaying until they earn £25,000 (recently cut from £27,660).
You pay 9 per cent of anything earned above that mark, so a salary of £35,000 results in repayments of £900 a year (9 per cent of £10,000).
Supporters of the system call it a sensible tax on graduates that makes higher education more accessible; Opponents call it a debt time bomb.
The successes and mistakes are for others to debate. My immediate concern is to evaluate the practical options presented to you today.
For example, you might have enough money saved or invested to consider using some of your savings to pay fees.
Financial logic dictates that if you earn, say, 4 percent on your savings, you would be better off using some of that amount rather than borrowing 7.3 percent from your child.
Second, you may have access to cheaper debt elsewhere. Despite the dire headlines about mortgage rates, many people still pay remarkably low interest rates.
Do I divert money from my mortgage overpayment? Put bluntly, pay 7.3 percent or pay 0.93 percent?
The rate on my five-year solution, for example, is 0.93 percent for another 3.5 years. Would it be wise to finance my child’s education instead of overpaying such cheap debt?
Put bluntly, pay 7.3 percent or pay 0.93 percent?
Of course, I’m being too simplistic. It’s probably not wise to put aside your long-term savings plans to help a child.
If that paternalistic instinct is too strong, it may be best to set aside the money so that it can be available in a time of great need.
The biggest challenge facing people in their 20s and 30s is establishing a foothold on the real estate ladder.
Assuming a 5 per cent rate of return after costs, the £9,000 invested today (equivalent to a year’s tuition) would rise to £14,823 in 2032, perhaps helping your child buy a modest flat sooner. turning 30 years old.
Repeat the same action in the second and third years and you could accumulate £41,000.
Crowd Safety: As student debt piles up, could the UK follow the US and eliminate some of it?
Another good reason to take out graduate loans is crowd security. While there appears to be a political commitment to the system today, who knows what could happen in the future.
In the United States, President Joe Biden has eliminated $39 billion of debt for 804,000 graduates, directing aid to those who still owed money after 20 years.
If this can happen in the home of right-wing economics, why not here? I prefer to side with the greater electoral power of those with student debt.
And lastly, who knows what could happen to your child. While you can imagine a lucrative career path today, who’s to say what could happen in the next 40 years?
They may choose a route that you would rather not choose.
I have rightly specified 40 years, because that is the new horizon for when debt is eliminated.
For the previous students, the sacred day of destruction came in just 25 years.
In that sense, the caveat to all this is that the rules keep changing: settlement days are getting further and further apart and payment thresholds are getting lower and lower.
While I think it is right for my son to take out all the loans today, I would say that it is a difficult decision and may not be true in the future.
I am grateful that I was able to leave college with very modest debt. I was the first candidate to take out a loan to cover living expenses in 1991 – just £830 in London and with a rate of 2.3 per cent which fell to 1.5 per cent in the second year, if memory serves .
There was little at stake for our fortunate generation; Today, with student debt exceeding £200bn, the stakes are much higher.
- Andrew Oxlade is a former This is Money editor who knows you work in the investment industry. He is currently chief investment officer at Fidelity. This is the first of Andrew’s new monthly columns.