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By Anne McClean, Partner, Head of Wealth
In my recent article, Helping to Fund University: A Family Approach, I looked at the wider question of how families can meet the rising cost of higher education. One area that often generates further questions is student finance itself.
Most parents know roughly what a degree costs upfront. Fewer have a feel for what actually shows up on the balance by graduation, because interest accrues from day one, not from when repayments start.
This piece covers the mechanics, real numbers for the first cohort through the system and what the repayments may mean for family planning long after the graduation photographs have been taken.
The basics
Anyone starting a course from August 2023 is on Plan 5. Two things set it apart from Plan 2: interest is RPI only, with no premium added on top (Plan 2 could run to RPI + 3%), and repayment does not start until earnings exceed £25,000 per year. Once that threshold is crossed, graduates repay 9% of earnings above it through payroll.
Anything left after 40 years is written off, regardless of the remaining balance. Under Plan 2, the write off period was 30 years.
Because interest is linked solely to RPI, the balance never grows in real terms. The cash added each year is, in theory, matched by inflation. What catches people out is that the cash figure still climbs throughout the degree, and it is the combination of that starting balance, the 40 year repayment period and a threshold that has remained fixed at £25,000 since Plan 5 launched in 2023, and which is currently scheduled to remain at that level until April 2027, that determines how much is ultimately repaid.
What a typical course actually costs by graduation
The first Plan 5 cohort, students who started university in September 2023, graduate this summer, so for once we have three real years of interest rates to work with rather than projections.
The exact amount borrowed will vary depending on maintenance entitlement, household income and where a student studies. For context, in 2026/27 a student living away from home and studying outside London may be able to borrow up to £10,830 in maintenance loan on top of tuition fees of £9,790. Students studying in London, or those eligible for higher rates of support, may borrow more.
The figures below are therefore illustrative rather than representative of every student.
Total borrowed: approximately £58,000
Total owed at graduation: approximately £62,700
In other words, the typical student leaves university owing around £4,700 more than they actually borrowed, roughly 8% higher.
Almost all of that increase comes from the first year. The 2023/24 academic year was unusual. RPI reached 13.5% following the post mini Budget inflation surge and, rather than allowing the full rate to apply, the government capped interest at the Prevailing Market Rate, which itself crept up from 7.3% to 8.0% over the course of the year. Years two and three, at 4.3% and 3.2% respectively, added comparatively little.
A student beginning their studies today, in more stable inflationary conditions, would likely see a smaller gap between the amount borrowed and the amount owed on graduation than this first cohort did.
One further point worth noting is that interest continues to accrue after graduation and before repayments begin. As a result, the balance shown on a graduate’s first statement is usually a little higher again than it was on the day they left university.
Then what: does it matter who clears it fastest?
Once repayments begin, the outcome depends heavily on earnings trajectory, and it can play out in a way that is not always intuitive.
Take two graduates who both leave university owing around £62,000.
Josh follows a steady career path and may still have a balance outstanding at the 40 year write off point. Lottie progresses rapidly into a higher paying career and is likely to clear the balance much sooner.
Counterintuitively, Lottie may repay considerably more over her lifetime than Josh despite having borrowed exactly the same amount. This is one of the reasons student loans should not always be viewed in the same way as conventional borrowing.
The question then becomes: how likely is it that a typical graduate actually clears the balance at all?
What this looks like across different careers
To make this more concrete, we modelled four career paths: GP, solicitor, architect and teacher, using published UK pay scales and a starting balance of approximately £62,700.
For simplicity, this assumes continuous full-time work on a broadly steady earnings path, with no career breaks, part-time periods or additional borrowing.
Assuming average long term inflation of approximately 3% per annum.
Career progression has been modelled using published UK pay scales and salary survey data for each profession. Actual outcomes will vary by employer, location, specialism, career breaks and working patterns.
The most surprising result is that all four professions clear the balance before the 40 year write off period. In each case, the graduate ultimately repays the full value of the loan in real terms, even though the headline cash amount repaid varies significantly.
That is the RPI only design working as intended. The real value of the debt does not increase over time, so anyone who ultimately clears the balance repays broadly what they originally borrowed.
What changes is the timeline.
The teacher example is perhaps the most surprising. Despite a significantly lower earnings profile than the GP, the loan is still repaid in full before the write off date. The difference is not whether the debt is repaid, but how long it takes.
Three important caveats apply. Firstly, this assumes uninterrupted full-time employment. A genuine multi-year career break can materially change the outcome and may make write off more likely. Secondly, the 3% inflation assumption is illustrative and should not be treated as a forecast. Thirdly, the salary progression used is simplified. It does not fully capture the lower paid training periods that precede full qualification in some professions, such as a solicitor’s training contract or an architect’s Part 1, Part 2 and Part 3 route. For those professions in particular, actual years to clear may run longer than shown here.
The knock on effect: children and a first home
The loan balance itself is only part of the story. For many graduates, the more immediate consequence is the effect repayments can have on affordability when applying for a mortgage or supporting a young family.
The average first time buyer is now in their early thirties, and the average age at which people have their first child is broadly similar. These are often the same years in which student loan repayments become most noticeable.
Student loans do not appear on a conventional credit report in the same way as personal loans or credit card debt. However, mortgage lenders do consider the ongoing monthly repayment when assessing affordability.
A £700 monthly student loan deduction does not simply reduce disposable income by £700. Mortgage lenders also factor that commitment into their affordability calculations, potentially reducing overall borrowing capacity by tens of thousands of pounds.
For many graduates, this has a more immediate impact on life choices than the loan balance itself.
For the GP, the squeeze is particularly noticeable. Repayments are at their highest precisely during the years when a deposit may be being accumulated and a family established.
Teachers experience a smaller monthly impact, but over a much longer period.
Children can add a second layer of complexity. Childcare costs and periods of reduced income often arrive during the same years that graduates are making meaningful student loan repayments and seeking mortgage finance.
The student loan system does provide some protection, as repayments automatically fall when income falls. However, repayments pausing or reducing can also mean the balance remains outstanding for longer.
The timing question: what does helping now versus later actually change?
From a family planning perspective, this is where the discussion becomes particularly interesting.
What a family does at 18 sets the trajectory, but it does not necessarily determine the outcome.
The first consideration is whether the child is likely to clear the loan in full. If they are on a GP or solicitor style trajectory, reducing the starting balance may produce a meaningful long term benefit. If not, an early gift may simply reduce a balance that would otherwise have been written off.
The challenge is that this is rarely obvious when someone starts university. It often becomes much clearer in their mid twenties once a career path begins to emerge.
The second consideration is what the money would otherwise be doing.
A student loan grows only in line with RPI. Family capital held in investments has historically delivered higher returns than inflation over long periods, although past performance is no guarantee of future outcomes. Assets earmarked at 18 and left invested may therefore continue to grow for another decade or more before they are actually needed.
That capital could potentially become more valuable when used towards a house deposit, a childcare gap, parental leave, or another significant life event.
The third consideration is precision.
A gift made at 18 is effectively based on assumptions about needs that may arise years later. Support provided for a specific purpose, such as a mortgage deposit or a period of parental leave, can be tailored to a real requirement rather than an estimated future one.
Finally, there is the family’s own position to consider.
Waiting assumes that the ability to help will still exist in ten or fifteen years’ time. Health, changing circumstances and competing priorities can all alter that picture. For some families, there is a strong case for helping earlier simply to provide certainty.
None of these factors points to a single right answer. Rather, they suggest a conversation worth revisiting over time.
Conclusion
An initial decision may be taken when a child starts university, but some of the most effective planning happens years later, when career paths, earnings potential and family circumstances are clearer.
University funding is rarely just about covering fees. It is often one of the first opportunities a family has to think strategically about how wealth can support the next generation, not only during their studies, but also through the key milestones that follow. The question is often not whether to help, but when that help is likely to have the greatest impact.
This is issued by IPS Capital LLP of 4 Eastcheap, London EC3M 1AE; a limited Liability Partnership registered in England OC328405 and authorised and regulated by the Financial Conduct Authority. It is issued in the UK only. This publication does not constitute advice and is for information purposes only. You should not make any investment decision based on this information alone. The information contained herein is correct to the best of our knowledge and we may not be held liable for any errors or omissions. IPS Capital LLP does not offer tax advice and you should seek professional tax advice for your own circumstances. The value of investments can fall as well as rise and you may not receive back the full amount of your original capital.
