Is it time to add UK university fees to your expat mortgage?
With A level results just a few weeks away and news that from September, new student loans will be charged at a compound interest rate of 6.1% per annum (the formula is UK inflation, Retail Price Index, plus 3%) from the moment funds are drawn, many parents are now starting to look at alternative funding options. This is particularly true of those who have mortgages or own property in the UK, where mortgage interest rates can be as low as 2.49% for expatriate buy to let loans.
“Put another way, for the expatriate parent thinking of sending their child to university, adding the fees to the mortgage could save significant sums in interest costs,” says expat mortgage brokers Offshoreonline.
Student loans are not like ordinary loans, though. In fact, the politicians have made the obfuscation of student funding an art form. Loan contracts are so complex, it is virtually impossible to determine whether a student will repay a loan, whether it will be written off or whether they will be condemned to a life of ever ballooning debt. Assuming course fees of £9000 each year and living costs of £3575, according to the Complete University Guide website, your debt on the first day you finish university will already have risen to over £40,000.
So for parents, the challenge is to determine whether it is worth their child taking on this debt, or whether the claim of the government, that many loans will never be repaid, is a risk worth taking.
The salary threshold above which loans must start to be repaid is £21,000 or around £12 per hour, so by now you will be wondering if it is worth paying 6.1% on a debt of £40,000 to start on a salary many can earn now in low or non-skilled jobs on the high street. At this level of salary, you will never repay the loan, we are told.
But, asks Offshoreonline director Guy Stephenson, “ What financial message does that send to a 21 year old at the start of their working life? For many, understanding debt is hard, but to imply that debt is unimportant and it will magically go away is surely very irresponsible. Moreover, it is not as if the debt will have no effect – all the mortgage lenders we have spoken to will take student debt repayments into account when considering loan applications, so it will effectively reduce the amount a debt laden student can borrow to get on the housing ladder.”
If you are confident your child will use university as a genuine springboard to land a higher than average salary and will be quickly be earning £50,000 or more, the debt will have to be repaid. At this point, the question is, do you as a parent allow your child to take on debt at 6.1% or do you allow them to access far cheaper funding via your own mortgage?
Those who will be worst hit by student loans are the average earners – they will never earn enough to repay the debt, but will instead will always be servicing a loan that is growing at rate they cannot control for the vast majority of their working lives. Affording a mortgage will be hardest for is group.
For anxious parents, it will be of some comfort to know that an expatriate mortgage might offer a solution with a personal plan to repay the debt to you, once your child starts earning. Either way, it is hard to see how the current student loan regime offers fair or good value, let alone a good example to those needing a crash course in money management at the age of 18.