If your child is about to head off to university, should you make him take out a student loan and start working life with a whopping debt (the average is now £44,000)? Or should you dig deep and pay his tuition fees yourself? It's a question that will be on many parents' minds this month but there is, sadly, no simple answer.
Until 2012, student loans were so cheap that you might as well have taken the money, whether you needed it or not. No more. The rate on loans taken out under the new system is based on the level of Retail Price Index (RPI) inflation, plus 3%.
Right now that comes to 6.3% (it's based on RPI from the previous March) and will fall to 5.5% from September.
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That's not exactly a super-high rate of interest, given that the money is being lent to people with no income and no proven track record of loan repayment. But in a world where the Bank of England rate is 0.5%, it isn't exactly cheap either.
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This rather suggests that if you were certain your child would end up having to pay the money back, then it might make sense to make life easier and cheaper for him by giving him the money up front.
But here's the rub. Most people will never pay back their student loans. You don't have to start repaying until you are earning £21,000 ayear (you then pay 9% of everything you earn above that).And once you have graduated, the interest rate also becomes progressive, so that you don't pay the full RPI +3% until you are earning £41,000.
Finally, the debt is written off after30 years. So if your child never earns much, or takes large chunks of time out to care for his or her own children, they may never pay back much of the loan.
If, on the other hand, he works consistently in a reasonably high-earning area, he will end up paying back all the capital and all the interest (which compounds from the first year, not the last).
So there's a conundrum for you: if you expect your child to be a financial success, you should pay his fees. If you expect failure, you should not. However, this isn't the only thing to think about.
Student loans don't affect your credit rating, but they may well affect other things such as the ability to get a mortgage or to save. That matters, says Ian Cowie in The Sunday Times: Scottish Widows reckons the rise in maximum tuition fees to £9,000 a year will "raise the average age of first-time buyers from 29 to 44 and make it impossible for many to contribute to pensions".
The fact that the debt is written off just before pensionable age doesn't help much with either issue. His solution? Help your children out and take part of your estate out of the inheritance-tax net at the same time: if you can afford to, pay the fees and their living costs too.
