Student loans: an intergenerational planning conversation

Most notably, graduates with substantial debt are more likely to delay buying a home, postpone starting a family and/or prioritise immediate income over long-term career development (source: LBC) and some career choices look far less viable when repayments stretch out across decades, often with little prospect of any meaningful debt reduction. 

Why balances can grow even when repayments are being made

With an increasing percentage of students paying less than the interest on the debt (66% in 2020/21 rising to 79% in 2024/25 (source: Student Loans Company), balances can continue to grow for years, even where regular repayments are being made. Unlike more traditional forms of borrowing, student loan repayments are linked to earnings rather than the size of the outstanding balance.  This makes repayment rates harder to interpret than other debts such as mortgages, loans or credit cards.  Whilst the income-contingent nature of repayments is one of the key protections of the system, providing valuable flexibility during lower-income periods or redundancy, it means that student loan interest can continue to accrue during periods where repayments reduce or cease altogether – for example during a career break or maternity leave.  This structural inequality can equally result in a position where, for example, graduates who pause their career to raise a family may ultimately repay more over their lifetime than a graduate with an uninterrupted full-time career.

Why repayment outcomes vary so widely

Student loans are often described as being “like a graduate tax”, but the reality is more complicated.  Factors such as starting salary, wage growth, bonuses and career breaks mean graduates with the same starting balance can experience very different outcomes with regards to the total amount repaid. Modelling the likely repayment path can therefore be helpful before making voluntary repayment decisions. Higher earners are most likely to be on track to repay the loan in full within a reasonable period, whilst lower earners may receive greater benefit from the final balance typically being written off. It tends to be middle earners who often experience the least effective outcome: making repayments for decades, repaying a substantial amount (particularly relative to their income), and yet never clearing the outstanding balance. The figures in the below table highlight this, based on a Plan 2 loan, current repayment rules, a starting student loan balance of £45,000, assumed wage growth of 2.6% p.a. and RPI of 3.2% p.a.

The wider impact on tax, pensions and mortgages

For financial planners, this opens up interesting and complex conversations with graduates and their partners or family members around whether making voluntary repayments would be likely to provide value. For graduates who are unlikely to ever repay the loan in full and are on track for the balance to be wiped after a set period of time (30 years or age 65 for Plan 2 loans, or 40 years for Plan 5), having periods of reduced or nil repayments may not necessarily be detrimental and can even reduce the total amount repaid over time. This can open up wider planning opportunities including pension contributions and salary sacrifice arrangements, where these reduce the income figure used to calculate student loan repayments.

It also necessitates broader conversations within a household, particularly where a planned career break (maternity leave, for example) may result in an unwanted discrepancy between the long-term debts of both parties. Conversely, for those likely to repay in full, reduced or missed repayments can increase the effective cost of the loan over a lifetime. In these cases, the conversation may focus more on earnings progression, repayment strategy and whether voluntary repayments are worthwhile.

In addition, student loan repayments can also interact with other parts of the tax system in ways that are not always well understood.  As financial planners, we frequently talk with our clients about the 60% tax trap, where the withdrawal of the personal allowance creates an effective tax rate of 60% on income between £100,000 and £125,140. In some circumstances, the added combination of student loan repayments, National Insurance, the loss of Child Benefit via the High Income Child Benefit Charge, and the loss of free childcare for working parents can push the effective marginal tax rate for this income bracket over 100%.

The repayment of student loans can also impact decisions and timings associated with home ownership. Whilst student loans are treated as government debt not commercial credit, and therefore do not impact upon credit scores, repayments do impact upon affordability checks for mortgages. Monthly repayments reduce disposable income, potentially making it harder to borrow and delaying home ownership. This may in turn result in a longer exposure to rent inflation, delayed access to property wealth accumulation, and the opportunity for using mortgage repayments as a forced saving mechanism.

How families can approach the decision

Our conversations are not limited to graduates themselves. It is not uncommon for parents/grandparents to wish for their children/grandchildren, at least for a period, to take out student loans to better appreciate the cost of their education pathway. Yet those generations who themselves benefitted from free or lower-cost higher education are often understandably concerned about younger generations being saddled with significant debt for a long period of time. This inevitably leads to a balancing act between encouraging students to take responsibility for their financial independence versus recognising and wishing to address the longer-term financial and psychological burden that may ensue from holding high levels of debt.

For those family members who are considering gifting within their own lifetimes, the question is rarely as simple as “should we repay the loan?”, particularly since voluntary repayments are generally irreversible and can divert capital away from other goals.

In helping families to explore their options, we typically evaluate the potential benefits of repaying a loan immediately after graduation, compared with using the available capital for other means such as a house deposit, pension funding, ISA savings, building emergency funds, or wider inheritance tax planning. Importantly, this is never a purely financially motivated decision. Some families place a high value on removing the psychological burden of debt. Others may prefer to preserve the flexibility of a managed debt route, particularly where the borrower may never repay the loan in full under the current rules and where the loan repayment terms may change in the future. Where repayments are making it difficult to save and where capital for gifting may be limited, we often see graduates retain student loans and prioritise gifted capital to go towards a house deposit or to help with the cost of starting a family. This is particularly the case where smaller overpayments may still leave the graduate repaying 9% of their earnings for the full 30 years, in which the overpayments won’t have made a material impact.  However, where capital is more abundant, and especially where the graduate is a high earner with very strong salary prospects and the loan is on track to be repaid in full, prioritising early student loan repayment can be a good use of family capital.

As highlighted above, student loan planning is highly individual. The type of repayment plan, future earnings trajectory, potential career breaks, health, family support, attitudes to debt, wider financial goals, and the possibility of future policy change all need to be considered before committing substantial capital that might otherwise be used for different purposes. For some families, repaying a student loan may be financially sensible; for others, the same money may be better used for other purposes. This is where financial advice can add real value; not by presenting one universal answer, but by helping families understand the trade-offs, model the likely outcomes and make informed decisions before committing capital that could affect several generations.