Last month, I held a hushed celebration at home. It was just me, a glass of champagne, and a muted feeling of satisfaction at having finally, at the age of 45, paid off my student loan. I didn’t hang the bunting or make a big announcement, but the occasion did prompt a new life goal: to do everything in my power to make sure that my nine-year-old daughter doesn’t also spend her working life paying off student debt.
I took out a Plan 1 loan (those started before 2012) a quarter of a century ago during my four-year French and Spanish degree at the University of Cambridge. I took the maximum amount of just under £3,000 a year (around £12,000 in total). I was also supported by my parents – they paid my £1k per annum tuition fees – as there was a ban on paid work during term-time. I supplemented my loan and their support with work during the long holidays, which paid for travel and my third year abroad in Barcelona and Mexico.
Like most students, I didn’t think much about paying the money back. I would not have to consider doing so until I was in my mid-20s – a lifetime away – and earning above a certain salary threshold (I’m sure some students today behave in a similar way. It’s cash they need. They assume later they’ll earn enough to pay it back). Two decades later, the truth is, I’m really ashamed that it’s taken me so long.
But there is a world of difference between the terms on which I took out my money and the terms for students nowadays –+ of which I hope my daughter may become one.
A simplistic way of describing it is that my loan was fair and had a low to negligible interest rate; I’m not surprised Tony Blair managed to sell it to the public. Those paying off Plan 2 loans [2012-2023] and now Plan 5 loans [for undergraduates after 2023] are stuck in a spiral in which they need to earn a large amount in order to have any hope of paying down the debt. Last month, the Institute for Fiscal Studies reported that unless a graduate on a Plan 2 loan earns more than £66,000, their repayments will be less than the interest accrued on their debt each month.
Not only is the interest much higher, but the cost of degrees is also much larger. A three-year degree can cost around £65,000 today, accounting for £30,000 on fees and the rest on living costs. According to the Office for Budget Responsibility’s inflation figures, to pay for my daughter in 2036 I would need £79,223. I suspect these are modest estimates, given it allows around £12,000 a year for living costs, but according to various surveys by NUS and Save the Student, British students might pay from £6,593 per year for university accommodation and from £6,384 in private (before bills). In London, the average rises to almost £10,000.
In comparison to today’s students, I had it exceptionally easy. My loan accrued interest at the Retail Prices Index (RPI) or the Bank of England base rate plus one percent, whichever was lower at the time. In recent years, this has been 3.2 per cent but it was previously lower. For those on Plan 2 earning above £28,870, it is 6.2 per cent, or even higher. Many students paying off loans taken out from 2012 have no hope of ever paying off the capital. They will see huge lumps disappear from their take-home salary every month without any reduction in the amount owed.
Why then did I pay off my loans incredibly slowly? There were a few reasons. The first is choosing low-paid work as a journalist. Each word I write now earns me less than each one did when I was 25. And that’s before we factor in the cost of living. While I’d had a job since the age of 14, I didn’t rush into the adult workplace. I took a year out before university followed by a four-year undergraduate degree and a one year masters, and began working on newspapers at 24.
For the first few years, I was self-employed. I should have repaid nine per cent of any earnings over £15,000 through my self-assessment tax return. Soon after, I took on an employed role earning around £35,000 and I do remember feeling the pinch at the monthly repayments, which were about £150 a month. At this rate, I should have paid off my loan in well under a decade, assuming a gradual increase in earnings. But while my income did at times cross into higher rate tax territory, I also returned to university, gave up my job to freelance again, and made a decision that is fatal to most women’s future earning potential: I had a baby.
In a bid to avoid my daughter Percy falling into the same trap, I turned to Marianna Hunt, a personal finance specialist at Fidelity International, for advice. “Saving for university can feel daunting,” she confirms. “But parents don’t need to start saving from birth, or aim to cover the full amount, for their efforts to make a meaningful difference. Parents often assume they need to fund everything, but regular contributions, even relatively modest ones, can significantly ease the pressure.”
She explains that investing £100 a month has the potential to grow to nearly £15,000 in a decade, whereas £200 could grow to just short of £30,000. I have been putting bits and pieces away in a Junior ISA for Percy for the past five years, including a regular £40 from grandparents. This has grown into a sizeable nest egg, around a third of what I estimate she’ll need, but there’s an equally sizeable risk, says Hunt. “Junior ISAs allow savings and investments to grow free of UK tax. However it’s important for parents to remember that the money legally belongs to the child, and they gain full access at 18.”
She points out that I could continue to save for Percy within my own ISA allowance of £20,000 (which I never get anywhere close to using), leaving me to direct the money to university fees or elsewhere, as I choose. Crucially, this would prevent my daughter from blowing the lot on a car (or something else).
The risk-averse might shy away from stocks and shares, but inflation can erode cash’s value while the rising cost of living leaves it worth even less. I worry about an ISA not being a portfolio plan, but holding different funds and asset types can help to manage risk over time, Hunt says.
As the time for university grows closer, Hunt recommends reducing any risky investments. “It becomes increasingly important to reduce exposure to market volatility,” she says. “Gradually moving savings into lower risk assets, or selling investments in stages ahead of when the money will be needed, can help protect the value of the pot and reduce the risk of a market fall just before fees or living costs are due.” I make a note to work on this when my daughter is in sixth-form.
I am a big fan of Hunt’s advice that something is better than nothing. “Parents don’t need a perfect plan from day one,” she says. “Regular contributions, tax-efficient accounts and occasional reviews can still add up to a meaningful education fund.”
I’m aware that not everyone will think I’m doing my child a good turn by hoping to pay for her studies. I do think that young people learn financial management by experiencing it and she won’t be getting an entirely free ride. I have watched people deploy every method going to teach children and young people about money, and it never turns out the way they expect. Percy might not even want to go to university and that’s fine by me.
As it stands, the loan system is set up to trap graduates into a lifelong cycle of debt. Those who earn less, which means most people doing useful jobs in the health or social care and education sectors, are unfairly penalised because the slower their repayments, the more interest they pay.
I know plenty of younger people with loans will be shocked at the easy ride I had. I feel terrible for how Gen-Z has been shafted by the system, and think there should be some kind of interest amnesty. That would of course be a vote-losing policy, even though it would aid millions of young people. And if you’re in student debt and hungry, I’ll always be happy to cook you a hot meal and dispense some unasked-for advice.
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