A record number of school leavers head off to university this academic year. How those undergraduate degrees will be funded is likely to be a conversation dominating kitchen tables across the UK – unless you’re fortunate enough to be Scottish and eligible for free tuition in Scotland.
Why student finance is becoming a bigger burden for graduates
Student finance has become an increasingly contentious topic in recent years as growing numbers of graduates find that high interest charges make it difficult to reduce their loan balances.
Nine in 10 graduates with Plan 2 student loans have seen their debt grow even higher because their repayments do not cover the interest. Under Plan 2, interest can be charged at RPI plus 0–3% – although the total rate has been capped at 6% this academic year to protect graduates from the risk of rising inflation linked to the US-Iran war.
The newer Plan 5 loans, which apply to all students who started their studies on or after 1 August 2023, charge interest at RPI only, but the repayment threshold has been lowered and the repayment term extended from 30 to 40 years.
What’s important for all graduates to remember is that although the amount borrowed and interest rates affect the total loan balance, that balance does not determine how much a borrower must repay each month. Instead, repayments are determined by income. No matter how much you earn, however, reducing the balance can be a challenge.
The Department for Education expects only a third of Plan 2 borrowers who began their studies in 2022 to repay their loan in full, compared with 55% of those who took out a Plan 5 loan in 2025.
This highlights two important points.
First, regardless of the scheme, a large cohort of graduates will face student loan repayments for the full length of their repayment term. Second, any unpaid balance remaining at the end of that period is written off by the Government.
Right now, student loans operate more like a graduate tax, and what the system forgets is that few graduates like to start their careers in debt. Add to that the frustration of having deductions from your pay that make limited progress in reducing that debt and the issue compounds.
If student loan repayments then hamper a graduate’s ability to save and invest towards other financial priorities, like a house deposit, that can be even harder to swallow. This is where parental support can help.
Why parents are already key in a child’s university education
Many parents are already dipping into their own reserves to support adult children through higher education.
Rising costs are one reason, as is the fact that students from households earning above a certain income are eligible for only the basic maintenance loan of about £5,000.
The household income threshold (the figure that determines the size of a maintenance loan) for a student living away from home outside London sits at just above £62,000, and approximately £70,000 for an undergraduate living in London. When you consider that average student rents range from £575 a month across the UK to more than £1,000 in London, it becomes hugely challenging for a student to meet their living costs without additional support.
Unless a child chooses to live at home, supports their studies with a part-time job or secures a bursary or grant, then student finance is often the only viable option. Almost a third of prospective university students plan to live at home this academic year, according to the Universities and Colleges Admissions Service (UCAS). That’s up from one in five back in 2017.
Even with these options, there’s an inherent expectation that parents will bridge any funding gap.
No financial plan? What to consider
If your child is already university age, supporting them may be a stretch too far for your household budgets. But do not be tempted to take out a personal loan to fund your child’s education.
Unlike personal borrowing, student finance does not appear on the borrower’s credit record, and repayments pause if they stop earning because of illness or unemployment. Of course, you should do what you ca,n but do not jeopardise your own finances.
For families with a few years to go before university, the first question is whether taking out tuition fee and maintenance loans is the right approach and whether funding upfront offers any real advantage.
Another consideration is whether university is affordable for the family overall. For some young people, serving an apprenticeship or heading straight into the workplace may be a better financial option.
If university is the chosen route, then parents must decide what level of support they can provide without undermining their own financial well-being. Every £1 spent supporting a child through university is £1 less for other goals, like retirement. Are they willing to work a few more years to make up for any money they have given over to university costs?
For some, a blended approach works well, with costs shared between student finance, part-time work and parental support. It can literally be a case of the family sitting down to work out who pays what. A child with a substantial income from a part-time job may elect to cover their maintenance costs themselves and then ask the parents to cover the rent, limiting their debt to around £30,000 – when they graduate from a three-year degree in England.
The level of support will vary widely between families. One parent may be able to pay the rent or cover a percentage of living costs, and another may be limited to paying ad hoc grocery bills.
Although many parents would like to cover the full cost of university, this is realistic for only the very wealthy or those who planned well in advance.
Why a longer-term approach pays off
For those with a longer time horizon, there are more options.
If university is less than five years away, then saving in cash may be more appropriate. Those with a longer runway have more flexibility to invest, with plenty of time to ride out the ups and downs of the stock market.
If a parent decides to invest the full £9,000 Junior ISA allowance each year from birth, they could have a sizeable sum of almost £230,000* by the time that child turns 18. Even a more modest £250 a month has the potential to generate a pot of more than £76,000 over 18 years – enough to cover the tuition and maintenance costs for a standard degree in England.
Investing can help your money grow, but the value of investments can rise and fall, so you could get back less than you put in. Investing is for the long term, typically five years or more.
Parents should also note JISA assets belong to the child from 18, and there’s a risk they could fritter it away on something other than its intended purpose. So trust is a factor.
If a parent wants more control, investing within their own Stocks and Shares ISA allowance offers greater flexibility.
Trusts are also a consideration, particularly for grandparents who may want to set up the account, control the investment decisions and support their inheritance tax (IHT) planning at the same time. This can introduce some complexities so seeking professional advice may be, a good idea.
Remember that ISA and tax rules can change and that benefits depend on circumstances.
*Not accounting for inflation, based on annual investment growth of 5%, and annual charges of 1.25%
What if a parent can cover the cost in full?
Even for parents who can afford to pay university costs outright, the question is, should they?
Many graduates will never fully repay their student loans, meaning directing money towards other financial goals may offer greater long-term value.
Rather than clearing debt, some families may prefer to help with a first-home deposit, boost ISA pots or kickstart pension savings.
When you consider that adult children have lower earnings when they begin repaying student loans, paying the maximum £2,880 contribution into a pension for a non-taxpayer can secure up to £720 in tax relief. This could help make up for any lower pension contributions in the early years of a graduate’s career, while giving the money longer to benefit from compounding since money in a pension is typically accessible from age 55 (rising to 57 in 2028).
Parents must not overlook the IHT implications, however. Payments for an adult child’s tuition fees, accommodation and reasonable living costs during full-time education typically fall outside the scope of IHT. By contrast, a sizeable cash gift made later in life has the potential to be exposed to IHT at 40%.
Ultimately, supporting your child's higher education is admirable, but it should never come at the expense of your own personal finances. Striking the right balance between helping the next generation and safeguarding your own financial future is essential.
This article is for information only and not personal financial advice. If you’re not sure what’s right for you, a financial adviser can help.