Simply paying off a son's student loan - easy?

[stevensfo]

Apart from the obligatory mortgage, I've always hated borrowing and owing money so we paid our eldest son's tuition fees and helped him at uni. By the time our youngest went to uni, the fees had gone up x3 so he had the usual loan for tuition fees, though we still helped him a lot with rent etc.

He is far more careful with money than his elder brother so I'd really like to pay off his debt. Long story, but retirement plans and moving abroad are involved.

This year, his salary increase means that he will start paying off his loan. I have no idea how much it will be, but I heard that the loan company uses RPI + extra as interest rate, so the faster the better.

Yes, I will ask him, but he's a typical academic and his eyes glaze over if we discuss it. The good news is that he's quite frugal and very LBYM.

I'm asking only because I've heard that it's more complicated than people realise, though don't know why. I assume that when we paid their tuition fees for them, it wasn't legally considered a gift or loan, so paying off the tuition fee loan shouldn't be either.

Anyone know about tuition loans? Who is the CEO? Tony Blair? Are they based in the UK or Virgin Islands?

Steve

[DrFfybes]

AIUI you can just pay online by card, doesn't matter who's card.

However I think it is still written off 30 years after you qualify for repayments, and I've read that much of the debt will never be repayed. As interest rates on some were RPI +x% then there have been some pretty scary increases in some debts and cases where those just over the repayment threshold are seeing the debt get bigger each year, meaning they will never clear it.

Repayments are generally 9% of earnings over £25k.

Depending upon the current loan size and whather it will ever be cleared, it might be just as well you making the minimum payments to your son each year (which you could do using your £3k annual gift exemptions) until it goes away. If he stays in Academia he'll probably never clear it on the minimum payments

Paul

[GrahamPlatt]

A matter of “fiscal drag” involved here though.
Despite the current average salary being only just about the threshold for loan repayment to kick in, what happens if ghe threshold remains at £25k over the next 30 years?

[Mike4]

I'm no expert but I notice the amazing Martin Lewis does a TONNE of ranting about student loans on the R2.

My perception is his general advice is don't even bother to attempt to pay it off as the guvvermint will write it off in the fullness of time if you don't cave in first.

[Gerry557]

I think you need to estimate if they are likely to pay it off and how quickly. If they get a high earning job then it might make sense. If they get an average job and are likely to have periods of not working or starting a family then probably not.

Think of it as a tax rather than a loan. It doesn't need paying if he's not earning enough.

You could give the money to your son to invest for himself instead.

[londoninvestor]

I assume that when we paid their tuition fees for them, it wasn't legally considered a gift or loan, so paying off the tuition fee loan shouldn't be either.

Paying for the education (or maintenance, i.e. living costs) of your kids indeed isn't a gift for tax purposes – as long the recipients are under 18 or have remained in continuous* full-time education: HMRC IHT manual.

After the child has left education though, this no longer applies, so paying off your son's loan would constitute a gift.

* "Continuous" in the sense that there's no exemption for someone who goes back into education as a mature student, for example. Taking a gap year is OK though, according to HMRC.

[DrFfybes]

Paying for the education (or maintenance, i.e. living costs) of your kids indeed isn't a gift for tax purposes – as long the recipients are under 18 or have remained in continuous* full-time education:

Yes, I will ask him, but he's a typical academic and his eyes glaze over if we discuss it.

I don't suppose he's a Research Assistant and registered for a PhD or MPhil or similar as part of his role?

Paul

[Lootman]

I assume that when we paid their tuition fees for them, it wasn't legally considered a gift or loan, so paying off the tuition fee loan shouldn't be either.

Paying for the education (or maintenance, i.e. living costs) of your kids indeed isn't a gift for tax purposes – as long the recipients are under 18 or have remained in continuous full-time education. After the child has left education though, this no longer applies, so paying off your son's loan would constitute a gift.

That probably won't matter. Partly because it only becomes an issue if the donor dies within 7 years. And partly given that the OP stated that:

retirement plans and moving abroad are involved.

From April 2025, IHT is going to be based solely on residency, and it seems that the OP will become non-resident, so UK IHT won't apply to his estate anyway.

[pochisoldi]

Personally I'd leave the student loan alone - repayments are effectively a graduate tax, and if the graduate's not paying tax in the UK, then they won't be making any repayments.

When a parent pays off their son/daughter's loan, they are effectively paying additional voluntary tax, which (a) in the fullness of time their offspring may never have to repay in full, and (b) doesn't affect their offspring's credit worthiness.

In addition there's the IHT consequences of effectively gifting money - Your estate or your son could end up paying 40% tax on a payment that may have otherwise never have been made.

[stevensfo]

Paying for the education (or maintenance, i.e. living costs) of your kids indeed isn't a gift for tax purposes – as long the recipients are under 18 or have remained in continuous* full-time education:

Yes, I will ask him, but he's a typical academic and his eyes glaze over if we discuss it.

I don't suppose he's a Research Assistant and registered for a PhD or MPhil or similar as part of his role?

Paul

No not at all. Maybe I shouldn't have used the word 'academic', but he behaves like one, head in the clouds etc, only interested in his own work.

He's a computer coder. Computers have been his life and saved him from completely dropping out of education much earlier due to dyslexia and concentration problems. We were always prepared for the worst, but somehow he managed a Diploma, then Degree and Masters.

Steve

PS indeed isn't a gift for tax purposes – as long the recipients are under 18 or have remained in continuous* full-time education:

OMG really? Our eldest did a degree in Music when tuition fees were much lower, then spent a few years with a circus band travelling around the continent. Something awful happened and he wanted to go back and study Biology. His degree was free (not UK) but we paid for his Masters at UCL. So I guess that was officially a gift?

Oh well, we'll wait for the knock at the door at 3am.

[stevensfo]

Personally I'd leave the student loan alone - repayments are effectively a graduate tax, and if the graduate's not paying tax in the UK, then they won't be making any repayments.

When a parent pays off their son/daughter's loan, they are effectively paying additional voluntary tax, which (a) in the fullness of time their offspring may never have to repay in full, and (b) doesn't affect their offspring's credit worthiness.

In addition there's the IHT consequences of effectively gifting money - Your estate or your son could end up paying 40% tax on a payment that may have otherwise never have been made.

No, our youngest will definitely be working and tax resident in the UK. Fortunately, like his brother, he has both UK and EU passports so complete freedom of movement - just like Nigel Farage arranged for his own kids after the Brexit referendum!

On the other hand, when I pop my clogs and got to the great TLF in the sky, I will be tax resident in Italy.

Italy is a strange place. No ISAs, no realistic personal income tax allowance. But being a family-orientated country, the IHT allowance is a realistic 1 million euros, rather than the 325,000 pound limit frozen by the Conservative government 15 years ago.

Steve

[Lootman]

PS indeed isn't a gift for tax purposes – as long the recipients are under 18 or have remained in continuous* full-time education:

OMG really? Our eldest did a degree in Music when tuition fees were much lower, then spent a few years with a circus band travelling around the continent. Something awful happened and he wanted to go back and study Biology. His degree was free (not UK) but we paid for his Masters at UCL. So I guess that was officially a gift?

Oh well, we'll wait for the knock at the door at 3am.

Much less of a problem than that. Gifts are not taxable, and do not even have to be reported. So no problem arises unless all three of these happen:

1) You die within 7 years, and
2) The amount of your estate (including any failed gifts) that does not go to your spouse exceeds the relevant nil-rate band, and
3) You are UK resident in the tax year of your death

So I seriously would not worry about it, although one idea might be to split the gift between your wife and yourself just in case.

[stevensfo]

PS indeed isn't a gift for tax purposes – as long the recipients are under 18 or have remained in continuous* full-time education:

OMG really? Our eldest did a degree in Music when tuition fees were much lower, then spent a few years with a circus band travelling around the continent. Something awful happened and he wanted to go back and study Biology. His degree was free (not UK) but we paid for his Masters at UCL. So I guess that was officially a gift?

Oh well, we'll wait for the knock at the door at 3am.

Much less of a problem than that. Gifts are not taxable, and do not even have to be reported. So no problem arises unless all three of these happen:

1) You die within 7 years, and
2) The amount of your estate (including any failed gifts) that does not go to your spouse exceeds the relevant nil-rate band, and
3) You are UK resident in the tax year of your death

So I seriously would not worry about it, although one idea might be to split the gift between your wife and yourself just in case.

So I seriously would not worry about it, although one idea might be to split the gift between your wife and yourself just in case
Actually, it was equally shared between us.

You are UK resident in the tax year of your death
No.

Steve

PS I am extremely honest in all dealings, tax-wise, but I draw the line at what parents can and can't give their children.

[Kantwebefriends]

From April 2025, IHT is going to be based solely on residency.

I hadn't noticed. Does this mean that when my wife is a widow then she can clear off to be near the grandchildren and thus avoid UK IHT?

Goodness me. How long will she need to be abroad? What should I read about this? Should I wait for the Spring Budget just in case the beggars change their minds?

[Lootman]

From April 2025, IHT is going to be based solely on residency.

I hadn't noticed. Does this mean that when my wife is a widow then she can clear off to be near the grandchildren and thus avoid UK IHT?

Goodness me. How long will she need to be abroad? What should I read about this? Should I wait for the Spring Budget just in case the beggars change their minds?

RR's budget late last year announced the abolition of the tax concept of domicile, to be replaced by residency as defined by the statutory residency test (SRT). Since UK IHT worked off domicile rather than residency, that must change also.

My understanding is that the small print is still to be announced in the next couple of months, and that there may be a "waiting period" for full exemption. But nonetheless emigrating will be a more successful IHT avoidance strategy from 6/4/2025, ignoring any tax liability in the new country of course.

[stacker512]

Everyone saying to not bother paying it off early... might be thinking of the Plan 2 SLC loans.

The special type of Plan 1 loan I had, was the one where you kept paying until you were 65 years of age. No 25 year or 30 year clause, at all.

Repayment plan 1
If you took out the loan before 1 September 2006, your outstanding loan balance plus any interest will
be cancelled when you reach the age of 65.
If you took out the loan on or after 1 September 2006 but before 1 September 2012, your outstanding
loan balance plus any interest will be cancelled 25 years after the April when you first became due to
start making repayments.

- Page 13 of this (it's Wales, but that's irrelevant): https://www.studentfinancewales.co.uk/m ... 23_e_o.pdf

That one made sense paying off ASAP, so I did.
Subsequent work bonuses and payrises have been thoroughly enjoyed by myself without having to take a large chunk out of the pay packet and into SLC.

It's worth carefully thinking about whether you want / should pay it off faster.

[didds]

repayments are effectively a graduate tax, and if the graduate's not paying tax in the UK, then they won't be making any repayments..

has this changed "recently" ? I was under the impression that if working abroad above the threshold one was obliged to send paymnents ?

[Lootman]

repayments are effectively a graduate tax, and if the graduate's not paying tax in the UK, then they won't be making any repayments..

has this changed "recently" ? I was under the impression that if working abroad above the threshold one was obliged to send payments ?

I don't know but as a practical matter such a provision would be hard to enforce on someone outside of UK jurisdiction.

As I recall one of the original criticisms of such student loans is that it is too easy for someone to escape the debt by simply emigrating after graduating.

[didds]

has this changed "recently" ? I was under the impression that if working abroad above the threshold one was obliged to send payments ?

I don't know but as a practical matter such a provision would be hard to enforce on someone outside of UK jurisdiction.

As I recall one of the original criticisms of such student loans is that it is too easy for someone to escape the debt by simply emigrating after graduating.

Absolutely - and which was my immediate thought when I originally heard this requirement. It basically then becomes a voluntary tax!


And yes you are supposed to....

https://www.ucas.com/repaying-your-stud ... iving%20in.
"If you’re leaving the UK for more than three months, whether permanent or temporary, and don’t pay tax in the UK, you may still need to make repayments directly to the Student Loans Company (SLC)."~


But as you imply... how will SLC know?