A father with three daughters is seeking financial advice on whether to clear their student loans, give them money to manage independently or leave them responsible for repayments once they begin earning.
His eldest daughter has completed a three-year university degree and accumulated £45,000 in student debt. His other two daughters are studying five-year courses, with one in her first year and the other in her second. Their debts are expected to exceed £80,000 each.
All three have Plan 5 student loans. Although the father and his wife could afford to cover their daughters’ university costs, they chose to let them borrow the money for two reasons: to encourage financial responsibility and to allow the family to invest the equivalent funds.
Investments Have Outperformed Student Loan Interest So Far
The father said he expected to achieve investment returns above the interest charged on the loans by keeping the money in a global tracker fund.
Plan 5 loan interest is linked to the Retail Prices Index (RPI), which currently stands at 4.1 per cent for the tax year.
The investment strategy has worked over the three years since his eldest daughter started university. However, he is now concerned that strong market performance may not continue.
The couple already use their full annual Individual Savings Account (ISA) allowances. Any additional money used to settle the loans would therefore come from a dealing account subject to capital gains tax or other taxable assets.
They also contribute £300 each month to each daughter’s ISA. All three daughters have accumulated significant savings, which they have not yet needed to access.
Three Options Under Consideration
The father is considering whether to pay off his eldest daughter’s existing £45,000 debt and cover the ongoing university costs of the two younger daughters.
Another possibility would be to give each daughter an equivalent amount of money, allowing them to decide whether to use it to repay their student loans or invest it.
His third option would be to retain the money and allow the daughters to make their own repayments once their earnings exceed the relevant threshold.
Financial Planner Recommends Giving the Daughters a Choice
Grace Whalley, a chartered financial planner at The Private Office, said the decision involved more than comparing investment returns with student loan interest.
She highlighted the differences between the daughters’ expected debts, noting that the eldest had accumulated £45,000 while the other two could each owe more than £80,000 by the time they finish their courses.
Whalley said fairness between the three daughters should be considered when deciding how to distribute the money.
Her preferred approach would be to gift each daughter an equivalent amount and allow them to choose whether to repay their loans or invest the funds.
She said this would support the father’s original aim of teaching his daughters about money and financial responsibilities. Discussing student debt, investment choices and future financial goals with them would also help them understand the consequences of their decisions.
However, Whalley stressed that any gifts should only be made if the parents could afford them without compromising their own financial security, including their preferred lifestyle and retirement plans.
Plan 5 Repayments Depend on Future Earnings
The three daughters are on Plan 5 loans, which apply to students who started their courses after August 2023.
Under the repayment arrangements, graduates must pay 9 per cent of their earnings above the annual threshold of £25,000. The repayment period runs for 40 years.
Whalley said whether clearing the loans would be financially beneficial depended largely on the daughters’ future salaries and career paths.
A daughter entering a well-paid profession could potentially benefit from having her debt cleared. However, another who takes longer to qualify, works part-time or takes career breaks might never repay the full balance before the loan is written off after 40 years.
In that situation, using family money to clear the debt could mean paying off an amount that the graduate might otherwise never have needed to repay.
Different Financial Needs Could Influence Each Decision
Whalley said allowing the daughters to decide individually would give them the flexibility to respond to their own financial circumstances.
One might choose to repay the student loan immediately, while another could prefer to retain the money for a future house deposit or invest it in an ISA.
Keeping the funds invested would also allow a daughter to reconsider her position later, once her career and earnings become clearer.
Adviser Warns Against Leaving the Money Untouched
Whalley advised against the father’s third option of retaining the money and allowing his daughters to handle their student loans without receiving the funds.
She noted that the couple already use their ISA allowances and hold additional assets outside tax-efficient accounts.
From a family wealth perspective, she said transferring some assets to the next generation while the daughters are in their 20s and 30s could allow them to benefit from the money during important stages of their lives.
This could include buying homes, developing careers and starting families. Gifting assets earlier could also help reduce a potential inheritance tax liability later.
Whalley said many parents prefer to help their children financially while they are building their lives rather than leaving them to inherit wealth much later.
She concluded that gifting the money would allow the daughters to benefit earlier, encourage financial responsibility and recognise that their individual circumstances could lead to different decisions.
