Student Debt and advice | Ignore or address?

Professional Adviser ran a piece this week asking financial advisers for their thoughts on student debt. Often overlooked and forgotten, should it be given more attention in financial advice conversations? Callum White, one of our chartered financial planners was a contributor to the piece.

Connor Broadley Chartered financial planner Callum White says the answer depends on which student loan plan the client is on, as well as their wider financial plans and future objectives.

He says that those on Plan 1 and attend university prior to 2012 typically have lower debt levels and the maximum interest rate is at the rate of inflation.

“As a result, the debt in real terms isn’t growing so there is little rationale for overpayment,” White says. “Many students will clear the loan in full.”

Meanwhile, those on Plan 2 attending university between 2012 and 2022, typically have higher borrowing and higher interest rates so the loan will generally be growing in real terms.

“For low to middle earners, the loan is unlikely to be repaid in full before it is written off, making overpayments poor value,” White explains. “As a result, any available funds could be put to better use as a property deposit for example.”

He adds: “Higher earners on Plan 2 may repay the loan in full before the 30-year write-off, so there would be a reason to overpay, assuming this doesn’t conflict with other objectives which required capital in the future.” It is estimated that only 23% of the Plan 2 student cohort will clear the loan in full.

Those attending university from 2023 onwards will be on Plan 5, with a longer 40-year period to repay the loan, however the interest rate is linked to inflation so there is no real interest cost. White notes that due to the much longer repay period, it is expected that 50% of students will repay the loan in full, with interest, particularly middle and higher earners.

“Overpaying can reduce the total interest accrued, but advisers should ensure that short-and medium-term goals, such as a property deposit should take priority,” he says.

An issue ‘frequently’ affecting children of existing clients.

You can read the full article here: Professional Adviser – Student debt and advice