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Paying off children's loans is like 'throwing money away' warns North West expert

Ben Rogers says that parents paying their children's loans are 'throwing money away' following research Photo: MEN Media

Parents who are paying off children's student loans are being advised to 'stop throwing their money away'.

The advise comes from a Wilmslow-based company that have completed a report following months of research into the effect interest rates have on student loan repayments.

The research is aimed at students who started University after 2012.

Ben Rogers, Chartered Financial Planner at Equilibrium Asset Management, who led the research described the findings as 'fascinating'.

According to Ben, more parents with spare cash or large incomes are ‘considering making overpayments’ because their children have racked up massive debts while studying and those loans have been hit hard by the daunting current 6.1% headline interest rate.

Ben said:

More often than not, parents are trying to improve their children’s standard of living and to give them more financial confidence.

"Sadly, the parents that do this are not achieving anything, they are actually throwing money away. “That’s because the amount graduates owe has no impact on the amount they repay. Regardless of the interest rate accruing on the loan, the amount that is repaid each year is fixed at 9% of your earnings above £21,000. So regardless of whether you have £10,000 or £100,000 outstanding, the monthly repayments are the same given the same level of earnings. “Any overpayments made are applied to the outstanding balance so will only potentially reduce the term of the loan, not the monthly repayments.”

– Ben Rogers, Chartered Financial Planner at Equilibrium Asset Management

Ben also explained loans are written off after 30 years, regardless of whether you have repaid all but £1 or never paid a penny.

He added:

So, unless the repayment is large enough to impact the loan to a point where it can be cleared within 30 years, you’ll simply be throwing money away. “Furthermore, it won’t have any effect on the amount their child repays in the meantime. “Due to the structure of student loan repayment, their child won’t actually receive any benefit from the overpayment until their late 30s or early 40s. “We believe parents would achieve more by leaving their children’s student loans; instead using the excess cash to help their son or daughter in other ways when they are faced with the rising cost of living, stagnant real wage growth and a daunting housing market.”

– Ben Rogers, Chartered Financial Planner at Equilibrium Asset Management

Ben concluded that:

“Yes, ultimately, parents with large cash reserves can of course pay off their children’s student debt in full. “However, for those looking to simply lighten their children’s outstanding debt, either by a lump sum or regular overpayments, we strongly suggest they seek financial advice before going down this route.”

– Ben Rogers, Chartered Financial Planner at Equilibrium Asset Management