In the UK, student loans are a common way to fund higher education. The repayments plus interest can be daunting to those who fear having their children take on this debt.
Another option to help your kids go through university is by saving up and self-funding, but is this doable with your own personal finances to consider? Let’s look at the two options and maybe explore other ways to manage funding higher education.
UK student loans are primarily provided by the government through the Student Loans Company (SLC). The SLC is funded entirely by the UK taxpayer. It is responsible for both providing loans to students and collecting loan repayments alongside HM Revenue and Customs (HMRC).
What are the types of student loans available?
Plan 1 Loans
Loans apply if you’re from Scotland or Northern Ireland, or if you started your course before September 2012 in England or Wales. These loans have a fixed interest rate and are repaid through the PAYE (Pay As You Earn) system. The repayment threshold is currently £24,990 per year.
Plan 2 Loans
Loans are for students who started their course after September 2012 in England and Wales. These loans have a variable interest rate based on inflation and your income. The repayment threshold is higher currently £27,295 per year.
Plan 4 Loans
Loans taken out in Scotland are called plan 4 loans the repayment threshold is £31,395 currently.
Plan 5 Loans
This is a newer type of student loan which includes most loans taken out in England from August 2023 onwards. Repayment of these loans is not due to start until April 2026, so they do not yet cause payroll deductions.
The Repayment Thresholds 2024/25
| Plan1 | Plan 2 | Plan 4 | Plan 5 |
| £24,990 | £27,295 | £31,395 | N/A until 2026 |
The repayment threshold is crucial. Below it, you don’t need to make repayments. Above it, you contribute a percentage of your income. Remember that the threshold can change, so stay informed and up to date by visiting the Student Loans Company (SLC). Your employer deducts loan repayments directly from your salary using PAYE (Pay-as-you-earn) it’s convenient and automatic. If you’re self-employed or earn income from other sources, you’ll need to report your student loan repayments through self-assessment. It’s a good idea to keep accurate records!
Interest rates vary based on your income. While studying, interest accrues at the Retail Price Index (a measure of inflation) plus 3%. After you graduate, it depends on your income:
Loan Interest Payments
| Under £27,295 | £27,295 to £49,130 | £49,131 and above |
| RPI | RPI plus up to 3% | RPI plus 3% |
You can make voluntary overpayments to clear your loan faster. It’s a smart move if you have spare cash or intentionally working on being completely debt-free. No penalties apply. The repayment period is typically 30 years. After that, any remaining balance is written off. However, this might change in the future so don’t bank on it you essentially owe money to the government.
The Self-funding Higher Education Option.
Just like the cost of living, the cost of higher education keeps rising making it seem almost impossible to self-fund your children’s university but there are smart strategies to explore if you’re determined to do it debt-free.
Try Saving Your Way
Start early with a savings account and consider opening a Junior ISA (JISA) for each child. As of the 2024/2025 tax year, you can save up to £9,000 per child annually, tax-free. By starting when your children are young, you can take advantage of compound interest and potentially accumulate a significant sum by the time they’re ready for university.
Use your own ISA allowance as a parent, the allowance is (currently £20,000 per year) to save for your children’s education. This gives you more control over the funds and allows for larger contributions.
Part-time work and side hustles for you and your child (great way to introduce them to money goals) before and during university. Encourage your children to work part-time during their studies. This can help cover living expenses and reduce the overall amount you need to save.
Looking At Alternative Options
Apprenticeships offer a way to earn while learning, often leading to well-paid careers without the debt associated with traditional university degrees. Many top companies now offer degree apprenticeships, which combine work, study, and a salary.
Push for a gap year with purpose. A well-planned gap year can provide valuable work experience and potentially some savings. Encourage your children to use this time productively, perhaps by working in fields related to their intended studies.
Open University and other distance learning options can be significantly cheaper than traditional universities. Students can often work full-time while studying, drastically reducing the need for a loan.
Study Abroad Some European countries offer free or low-cost university education to international students. While there are living costs to consider, this can still be a more affordable option overall.
Some companies offer sponsored degree programs where they cover tuition fees in exchange for a commitment to work for them after graduation.
While focusing on self-funding, don’t overlook potential financial aid.
Bursaries are often available for students from lower-income families. There are perks to having children excel academically and in extracurricular activities. Many universities offer merit-based scholarships and grants. If James or Sophia want to become dentists or engineers, they’ll need to hit the books and get straight A’s or 7, 8 or 9’s.
Final thoughts….
While saving for your children’s education is important, don’t neglect other family financial priorities.
Whether you assist or advise your child to opt for a student loan or help them by saving the money for or with them both options have their stresses. Personally, I’m swayed more to the self-funding option.
Do your best to pick a financial path that’s ideal for your household but don’t put a strain on the four walls in the meantime and go into debt.
Budget, save or keep your emergency fund and aim to have 3-6 months of expenses saved. This is to cover unexpected expenses or financial setbacks. It provides a buffer against unforeseen circumstances such as home-related emergencies, car repairs, or sudden job loss.
Don’t compromise your retirement investments to fund your children’s education. You will get old that’s guaranteed by your sons or daughters might change their minds about university when the time comes.
Guy’s, the best gift you can give your children is not just money for university, but the knowledge and skills to manage their finances effectively throughout their lives. By involving them in the planning process and teaching them about money management, you’re setting them up for long-term financial success.
Stay informed about changes in education costs and funding options and be prepared to adjust your strategy as needed. With careful planning and smart financial decisions, you can help your children achieve their educational goals without compromising your family’s financial security.
