UK student loans – plan now for flexibility

With applications due to UCAS for the majority of UK university courses in mid January 2015, expat parents will probably be well advanced with planning their child’s next educational step and will have a firm view of first choice course and university. Less clear will be the impact financially of funding these next three or four years.

Students with English roots face borrowing up to £9000 per annum to cover academic fees, plus anything from £5555 to over £7500 living costs, depending on whether they attend college outside or inside London respectively.

A three year course could easily leave a new graduate over £45,000 in debt, whilst for a student attending a four year course in London, the figure becomes an eye watering £67,000. With many students expecting to achieve a starting salary well in excess of £21,000, the level at which repayments are triggered, student debt repayment should be a live issue for all parents of university students.

The formula governing the rate at which the repayment is set is 9% of the salary above the £21,000 threshold. So a gifted student starting in IT programming for example and earning £36,000 would pay £1350 per annum. That is money which has already been taxed at 20% and already had national insurance contributions levied at up to 12%.

“Anxious parents may want to think less in terms of repaying the debt early and instead more creatively about ways in which they can help ensure that the student debt accrued does not become a crushing deadweight on life plans and ambitions”, said Guy Stephenson, director, Offshoreonline.org.

One option to consider is an international mortgage to fund a UK buy to let investment. The parent could then gift this to their child, with or without strings attached. This would have the dual advantage of both building up capital and depending upon the gearing of the loan, providing additional top up income at a time when it is most needed. If the gift is allowed to stand for over 7 years, under current UK tax rules, it falls outside of the donor’s Inheritance Tax liability too.

Parents who have mentally already accepted a bill over three years topping £45,000 may prefer instead to put this into bricks and mortar. Assuming a 25% deposit, such an investment could leverage a loan of up to £135,000 giving a purchase target of up to £180,000, according to international mortgage brokers Offshoreonline.org. A well thought through purchase in an outlying London suburb or a university city such as Bristol should achieve between 4% and 5% as a rental return. At current buy to let interest rates, that implies  sufficient rent to pay the mortgage each month or, on an interest only basis, a surplus of some £200 per month , which would go some way to softening the blow for a student repaying a loan.

Prices in Bristol grew by 11.4% last year, according to the UK Land Registry, but planning on a more modest annual average rise would certainly be more prudent. Assuming growth rates of 5%, after 3 years, a £180,000 house could be worth nearly £30,000 more, whilst 4 years after purchase, the figure is nearly £40,000. After 7 years when IHT no longer applies, around £73,000 capital could have been built up, assuming an even capital appreciation rate of 5% per annum.

Whilst it will not be right for everyone, the idea of a hedge against student debt in the form of bricks and mortar may well appeal to some. International mortgages are available from UK based brokers such as Offshoreonline.org.