Martin Lewis: How the hidden university parental contribution works
They're 18 – that's old enough to vote, marry or join the army. True independence! Unless they're off to university.
For most under-25s, an increasing amount of their maintenance loan – there to help with living costs – is being dictated by an assessment of their parents' income. And this means parents are expected to fill the gap.
This is about living loans, not tuition fees
Tuition fees aren't a practical problem for most students. First-time English undergraduates' tuition fees are automatically paid for by the Student Loans Company. They also get a maintenance (living) loan. These loans are then added together in one account.
- Students only start repaying from the April after they left uni.
- They repay 9% of everything earned above £25,725 a year (increasing annually, it'll be £26,575/year from April 2020). Earn less, and there is nothing to repay.
- The loans are wiped after 30 years.
- It's predicted only 17% of students (the highest earners) will clear their loans and interest before they wipe. For the remaining 83%, the loan works more like a 30-year long 9% additional tax than a debt (I believe we should stop calling student loans a debt).
- Loans are repaid through PAYE and don't go on credit files.
In many ways the system is, financially, a no win, no fee education beware paying tuition fees upfront. In fact the prime issue for students is often that the loans aren't big enough, as even on a full loan it can be a struggle, as I'll explain.
The living loan is means-tested based on family residual income
For under-25s, in almost all circumstances the amount of living loan you get is based on an assessment of your family's residual income – which, as most students have little earnings, is a proxy for parental income.
If parents are divorced, it's the income of the household of primary residency (including your parent's partner who may live there)
Residual income is roughly defined as total income minus pension contributions. There is also a small reduction made to your assessed income if you have other dependent children, but frankly the amounts are farcical. See my FT article – the UK's hidden one child per family uni policy.
The reduction in loan starts with family income of just £25,000, and the maximum reduction hits for earnings over £58,000-£70,000, depending on where your child studies. And while back in 2015 all students received at least 65% of the maximum, now some get less than half.
Parents are expected to fill the gap, without being told
The implicit premise is that parents will fill the gap, but implicit isn't good enough. It should be explicit. Yet this fact, never mind the actual amount, is hardly touched on in any official literature.
All I can find is a flaccid mention buried in the Student Loans Company's 'How You're Assessed' guide, which says 'depending on their income, parents may have to contribute towards your living costs while you're studying'.
That isn't good enough. Parental income is the ONLY element that dictates how much of the full living loan a student gets. The loan letter should say something like (based on a student starting university in September 2020, living in London with £70,000 combined family income):
'Student – your maintenance loan is £5,981 a year. This is less than the full loan and we expect your parents to make up at least the £6,029 difference.'
Yet that doesn't happen. The offer letter only says the loan amount – it doesn't even say what the maximum loan amount available is, which would make things easier.
At my TV roadshows I often hear parents complain: "It's a disgrace, the living loan isn't enough to cover their rent – I have to scrape up extra". These are usually parents whose offspring don't get the full loan. It isn't an accident – the 'extra' is that hidden parental contribution.
One young student, desperately struggling on the minimum loan and unable to find work, asked me for help. I asked if his parents could afford to help and he said something akin to: "They can, but their view is I'm 18 now and at uni, and believe I should stand on my own two feet". They may well do, but the system doesn't. After I explained how it worked, his parents were shocked, and started to contribute.
The lack of transparency and clear guidance causes friction between students and parents. It also leaves some students in a dire position, with the risk of unmanageable debts or dropping out of university over cash flow issues.
How much are parents expected to contribute?
I hope our ready reckoner calculator will help you work that out. The Government should be telling parents how the system works, and helping them prepare for future outgoings – yet as it won't, we will.
I first wrote a Beware the parental contribution blog in 2016, and that had charts in it, so you could estimate. I've been excited to work with the team to build this calculator which should hopefully make it even easier to understand the scales of magnitude in your circumstances.
It's worked out based on the difference between the full loan (ie, the one those who have no family income receive – and is therefore deemed an appropriate amount to live off) and the loan that is paid for that amount of income.
And as our aim is primarily to give you advanced warning of how much to save, we do this over the full term of your course so you can see the total.
Why doesn't the Government tell people?
The lack of transparency over the parental contribution isn't new – it's been allowed by past Conservative, Coalition and Labour governments. Yet in recent years, with a large increase in the means-testing, I believe it has got more important.
Back in 2016, I wrote to the then Universities Minister Jo Johnson suggesting it was time to clear it up.
His disappointing and confusing response argued that just because the calculation is based on parents' income, that doesn't mean parents are expected to make a particular contribution – students can make up the difference from savings or part-time jobs.
Of course that's true, but that applies to all students regardless of parental income – so why differentiate based on parental income at all? By that logic, all students should get the same loan. If we don't expect parents to make up the gap, why judge on parental income?
I've raised the same issue directly with every subsequent Universities Minister, each of whom has been very sympathetic to the plight. Yet… they've done nowt about it.
My suspicion is no one wants to admit to mainly middle-class Britain quite how much they have to cough up.
Students can't force their parents to contribute
Bizarrely, while student loan amounts depend on parental income, there's no obligation on parents to contribute (and students can't force them).
This lacks logic – student and parents' finances should either be separate, or students should have some ability to be able to force parents to comply. Though of course that wouldn't have solved the issue of parents who earn above the threshold but don't have the money to support their child (eg, those with a high income, but on a debt management plan).
Some under-25s can have their finances declared independent from their parents and thus separately assessed, but the criteria is extremely tough. You need to prove that you completely supported yourself financially for three years before starting university.
Even the full loan may not be big enough
The irony of the student finance debate is that while many headlines focus on demonising the 'huge debts', the biggest practical problem some students face is that the loan isn't big enough. With rents rising (there really is a need for greater control over the student rental market), even the full living loan amount can leave some struggling to make ends meet.
Of course, bigger loans are a psychological deterrent to many from non-traditional university backgrounds. This is why proper financial education is needed to explain that, as I briefly outlined earlier, the unique way student finance works often means it won't cost them more.