We are trying to work out how best to support our 16-year-old daughter through university.
We plan to cover her rent and living expenses while she uses loans to cover her fees. But we’re now wondering if she should get loans to cover everything. The money that we would have contributed could then be used to build a nest egg. What would be the best approach?
Johanna Noble, money editor at MoneySavingExpert.com, says that, to decide, you need to understand how these loans work. Full-time students in England can take a “maintenance” loan to pay for their living costs, such as food, books, accommodation and travel. They are usually paid in three termly instalments direct to the student’s bank account. For Scottish, Welsh and Northern Irish students, there’s also a non-repayable grant available.
This loan is repaid in exactly the same way as the loan for tuition fees. You don’t have to pay it back until you leave university and then 9 per cent of everything you earn above £27,295 (for the current 2021-22 tax year), goes towards the balance of both loans together. If you don’t earn enough, you won’t repay anything. If it’s not repaid in full after 30 years, the remaining balance is wiped.
Yet not all is quite as it seems here. This is because the maintenance loan is means-tested. For almost every student under 25, this test is based on household income, which in practice usually means parents’ income. The higher the income, the lower the loan. In England, the living loan starts to reduce when total family income is just £25,000 a year and at about £60,000 a year it can be halved.
In England, the maximum loan amount also depends on whether students live at home or go away to study — with an uplift for those studying in London. The loan can be as little as £3,516 a year, up to £12,382 a year.
The fact that the system is means-tested based on parental income means implicitly that parents are expected to fill the gap. Outrageously, you won’t be told about this — even when you get the loan. There’s barely a mention of this in the official literature. Students just get a letter telling them what their living loan (or grant) is — without indicating by how much it has been reduced due to the means test. That leaves many heading off to university without knowing their loans are a fraction of the full amount.
To help parents work out what they might need to contribute, MoneySavingExpert.com has a parental contribution tool. In Wales, no parental contribution is expected as everyone gets the same maximum amount for maintenance, made up of a combination of a grant and a loan.
Of course, knowing what the parental contribution is doesn’t mean parents can afford to pay it. Yet at least it lets you understand what amount is expected, and helps students and parents have an open discussion about it.
The main issue most students face is that the loan isn’t big enough. The amount of money to live off can barely cover accommodation fees in some circumstances. So it’s crucial to ensure there is a real focus on budgeting. Part-time jobs, any grants and extra cash from parents will all help. All this should help you decide how much to help with up front, and how much, if anything, you want to put away for her instead.
Would my daughter’s boyfriend have a claim on her flat?
I have recently provided my daughter with funds to buy a flat in her own name and she wants her boyfriend to move in. Could he have a legal or financial claim on the property if they split?
Simon Blain, partner at law firm Forsters, says that when funding a purchase for a family member it is important to think carefully about the help you are agreeing to provide and to be clear with your daughter about the terms on which you are providing it.
Will you be lending the funds or making a gift? There can be tax advantages to making gifts during your lifetime but a gift is irrevocable. You also need to bear in mind that, once you have made a gift, you have very little control over what the recipient does with it.
A loan does not have the same tax advantages of a gift, but it can provide greater flexibility. It is important to be clear about the terms of any loan — what it is to be used for, when it is to be repaid and whether interest will be charged.
You also need to consider who you are making the loan or gift to. If your daughter and her boyfriend were purchasing the flat in joint names, for instance, you should be very clear that you are only making the loan or gift to your daughter and you should insist that is reflected in the ownership of the property.
Ordinarily, your daughter’s boyfriend cannot acquire an interest in her property simply by living in it. However, in reality, it is all too easy for situations to arise where he does acquire an interest.
For instance, if he received an inheritance, which he used to fund an extension to the property, he could potentially claim that a “resulting trust” had arisen, where he acquired an interest to the value of the contribution he made, and any increase in value attributable to that contribution.
Or consider a situation where your daughter and her boyfriend decide to start a family. He offers to become a stay-at-home father, but expresses concern that doing so would leave him economically vulnerable if they split up. To reassure him, your daughter promises that “what is hers is his”. In such a case, there is a real risk the court would decide that a “proprietary estoppel” had arisen, and that your daughter should be held to her promise.
Such scenarios can be avoided if your daughter enters into a cohabitation agreement with her boyfriend. This can record the exact terms on which they own and occupy the property and can deal with issues such as whether the boyfriend is paying rent or a contribution; whether they expect he will acquire a right to occupy the property; who will pay the bills; what happens if your daughter asks him to move out and whether furniture will be jointly owned or not.
Finally, if your daughter and her boyfriend ever decide to marry the situation changes dramatically and entering into a prenuptial agreement is strongly advised.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to firstname.lastname@example.org.
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