A parent with three daughters studying at university is wrestling with whether to pay off their combined student loans, which total more than £200,000, or take a different approach to help them manage the debt.
One daughter has completed a three-year degree and accumulated £45,000 in student debt. The other two are undertaking five-year courses and are each expected to build up debts exceeding £80,000. All three are on Plan 5 loans, which require graduates to repay 9 per cent of earnings above a repayment threshold of £25,000 a year over a 40-year period. The parent initially decided to let the daughters borrow for their education to encourage financial responsibility and because he believed he could grow the money faster than the loan interest rate, currently 4.1 per cent. However, he is now uncertain whether to continue this approach.
Grace Whalley, a chartered financial planner at The Private Office, advises against simply paying off the loans outright. Instead, she suggests gifting the money equivalent to the daughters and allowing them to decide whether to clear their debt or invest it. This approach, she explains, continues the financial education that was the parent's original intention. She also highlights that fairness matters given the significant differences in the three daughters' anticipated debt levels.
The decision ultimately depends on each daughter's future earnings prospects, Whalley says. For graduates entering high-earning professions, paying off debt early makes financial sense. However, those who work part-time, take career breaks or take longer to qualify may find they never fully repay their loans before they are written off after 40 years. In such cases, money spent clearing the debt could have been used for other purposes, such as saving for a house deposit.
From a broader wealth perspective, Whalley notes that transferring assets to daughters in their 20s and 30s could reduce inheritance tax liability later and allows children to benefit from family wealth when it has the greatest impact on their lives. The parent and his wife already maximise their individual savings allowances annually and contribute £300 a month into each daughter's savings account.