Student Finance – Pay Upfront or Invest Instead? The Smartest Way for Wealthy Families to Fund University

Carl Green, Director, Financial Planning at Evelyn Partners, the UK wealth manager says: 

“Student finance is complicated and has become an increasingly contentious topic in recent years as many graduates have found that high interest charges make it difficult to make meaningful progress in reducing their loan balances.  

“As a result, a growing number of parents are reassessing how best to fund their child’s higher education. A key question we are often asked by clients, either from those with children preparing for university or already partway through their studies, is whether taking out a tuition fee loan and/or a means-tested maintenance loan is the right approach. 

“For lower-income households, the answer is relatively straightforward as without the means to self-fund, there is rarely an alternative way to finance their studies. For others, there may be more options. This could include a blended approach, such as only applying for a tuition fee loan while covering living costs through a combination of part-time work and parental support.  

“For more affluent families, there is an even wider array of options. Parents or grandparents may be in a position to fully fund a child’s university education outright. This is where careful financial planning comes into play because while it can make sense for generous relatives to fund a child’s university studies upfront – because it reduces a graduate’s future debt burden – families should weigh up whether those funds might be better deployed elsewhere, such as being invested to support future financial needs such as the purchase of their first home. 

“Alongside these considerations sits the question of tax efficiency. Providing financial support for higher education must be balanced against broader estate planning objectives, including potential inheritance tax (IHT) implications.” 

Here Carl Green explores the key considerations for wealthy families looking to support their children through higher education:  

Supporting a child’s university education by paying the costs upfront, or even clearing the debt after they graduate, can make sense but it is very much a case-by-case decision. The key question to consider is whether the graduate is realistically likely to repay the loan in full under the current rules. If not, then settling the debt early can be counterproductive, because repayments would otherwise stop automatically once any remaining balance was written off. 

Student loan interest rates are typically set each September and pegged to the March Retail Price Index (RPI) inflation figure. A recent Government decision to cap interest rates on Plan 2 and 3 student loans at 6% offers borrowers some degree of protection from inflationary pressures. However, this is a temporary, year-long intervention and essentially a short-term solution to the wider challenges facing students and graduates.  

While student loan interest does not affect the monthly repayments - as these are determined by income level - it does influence how long it takes to clear the debt. Higher interest rates extend repayment periods and, in many cases, increase the overall amount repaid over a lifetime.  

Importantly, the interest rate for Plan 5 borrowers – those who began their studies from September 2023 – is subject to a different structure. Interest is set at RPI only, meaning in theory they will not repay more than they borrowed in real terms. However, this is offset by a longer repayment period of 40 years and a lower salary repayment threshold compared with Plan 2 loans. 

This is why an increasing number of Evelyn Partners clients are choosing to foot the bill of a child’s higher education upfront. While family members should always be wary of putting their own finances in peril when considering larger financial gifts, for those that genuinely can afford to help, the question remains whether paying upfront is always the most effective use of capital. 

An alternative approach is to let the student take out the loan and instead retain or invest that capital to support major lifestyle costs after they graduate, such as buying a home. 

The Government’s own projections suggest that a large proportion of today’s student loans are never expected to be repaid in full. Only around 56% of full-time undergraduates starting a course in 2024/25 are expected to clear their student loan, meaning roughly 44% will have some degree of write off. 

Outcomes can vary considerably depending on career trajectory. Graduates with patchy earnings, career breaks or long spells below the repayment threshold are far less likely to repay their loans in full. Higher earners may do so, but often at a very high total cost once years of interest are taken into account. 

Crucially, parents or grandparents should never undermine their own financial security to fund student debt. You must be confident your retirement income is secure, that you have sufficient accessible savings, and that future costs, including care, have been properly considered. Once money has gone towards a student loan, it cannot be recovered if circumstances change. Evelyn Partners typically uses cashflow modelling to determine whether a client has the headroom to gift money without putting their own future financial security in jeopardy.  

In practice, more families may find their money is better used elsewhere. Helping with housing costs, childcare or general living expenses can often have a far more immediate and tangible impact than focusing on a student loan balance that may never be repaid in full anyway. 

It is important to remember that even when students take out student loans, parental support is often still needed, particularly to help meet accommodation costs. Most students living away from home outside London receive a maintenance loan of around £5,000 a year, as the maximum entitlement is reserved for those from the lowest income households. In many parts of the country, this falls well short of covering rent, let alone other costs, so parents are likely to need to bridge the gap. 

Under Plan 5, the interest rate has been aligned with RPI with no additional margin - (3.2% + 0%), making student debt relatively inexpensive compared to other forms of borrowing.  

When weighed against debts young adults might accrue elsewhere, such as overdrafts, credit cards, car loans, or even future mortgage costs, parents may achieve better long-term outcomes by building a tax-efficient savings pot for their children instead. Accounts such as Junior ISAs or bare trusts can provide a flexible and potentially more impactful use of capital than ringfencing funds to cover tuition fees and living expenses.  

In particular, helping an adult child onto the property ladder could deliver a far greater boost to financial security than eliminating student debt. A larger deposit improves mortgage affordability and reduces interest costs over time, as well as enabling them to avoid or reduce the time spent paying for rental accommodation. 

To put this into context, the average debt among borrowers who finished their course in 2024 was £53,000 at the point they first became liable to repay this debt in April 2025, provided they had surpassed the income threshold. This is significantly higher than average personal debt held by young people more broadly. Meanwhile, the average property price for a first-time buyer in the South East is now approximately £300,000*. 

If funds that would have otherwise been pumped into university costs are instead set aside and gifted for a property deposit against the £300,000 average cost of buying, the impact on affordability can be significant. Under this scenario, the loan-to-value (LTV) ratio is reduced by around 13%, assuming the £53,000 cost of studying is instead covered by a loan. 

By reducing the loan-to-value by 13%, this has the potential to reduce the average mortgage rate from a 95% LTV two-year fix of 5.81% (with a 5% deposit of £15,000) to a 5.00% for an 85% LTV two-year fix**. On a £300,000 property, this could reduce the monthly repayment from £1,802 to £1,444 - a monthly saving of £358 per month or £4,296 per year. 

Given that a graduate earning £50,000 a year would repay £2,250 annually towards their student loan (equivalent to 9% of earners above the £25,000 repayment threshold), in this context, directing financial support towards housing costs rather than student debt could deliver a more meaningful financial benefit.  

Planning for this in advance can certainly help as £250 invested into a Junior ISA every month (£9,000 Junior ISA allowance) with a 5% growth rate would deliver investment growth of almost £33,000 on the total contribution of £54,000. That takes the total pot after 18 years to around £87,000 by adulthood. 

Parents or grandparents might also consider contributing to a child’s pension early. Paying into a pension for a child can secure up to £720 in tax relief on the maximum £2,880 contribution for a non-taxpayer. If adult children have lower earnings when they begin repaying student loans, parents could cover reduced pension savings in those crucial earlier years – allowing the money to compound sooner. 

Ultimately, the marginal benefit of paying off student loans early is small compared to the benefits of using up pension and ISA allowances or helping children secure home ownership early.  

If a child takes the student loan, and the parents choose to fund a pension instead, this will not only give their pension savings a 20% boost from Government tax relief – or higher depending on their marginal rate of tax - but will also provide their pension with more time to benefit from compound growth. In this instance, lost earnings in repayment of the student loan early in careers is offset by higher pensions later in life.  

A sum of £2,880 invested every year in a child’s SIPP from birth, topped up with government tax relief of £12,960 over 18 years, would mean total contributions of £64,800. Were those contributions to grow by an annual compound growth rate of 5% net of costs, then in their 18^th year the pension would be worth just over £107,000. Even if no further contributions were ever made after this age, the pension would tip over £1 million by the age of 63, just in time for retirement, based on a 5% growth rate, compounding monthly. That may be far more beneficial for a child’s future security than covering university costs upfront, which they may or may not end up repaying in full. 

A graduate finishing university this summer with around £53,000 of Plan 5 loan debt and starting their career on a salary of £28,000 could, depending on future earnings and the assumptions used on different repayment calculators, repay the loan in full over the 40-year repayment term. However, the total cost of those repayments could still be significantly lower than the value of a pension pot built-up instead. 

While gifting money to a child later in their life, for example to fund a house deposit, may leave them better off financially, it involves a different tax trade-off. By choosing not to pay education costs upfront, a parent forgoes the immediate inheritance tax (IHT) exemption available on qualifying education payments in favour of a potentially exempt transfer (PET), the tax treatment of which depends on their surviving for at least seven years after making the gift. 

HMRC recognises that paying for your child’s tuition, accommodation and a reasonable level of living costs during full-time education is part of your natural duty of care. 

Essentially this means that covering rent directly with a landlord, paying tuition fees straight to the university, or transferring a reasonable monthly allowance for living expenses will not be treated as a gift and therefore has no IHT implications.  

Other family members could also fund the costs and have them fall outside their estate immediately where it qualifies as normal expenditure out of income. In this instance, no seven-year rule or tapering applies, provided it is genuinely from surplus income and does not affect the lifestyle of the person making the gift. 

However, large lump sums for non-essential spending, or giving money without a clear connection to education or living costs, will be treated as gifts under HMRC rules. 

There are fiddly ways to give money to your children such as gifting a total of £3,000 a year, or £6,000 as a married couple, utilising the annual gifting exemption. Alternatively, there is the option to gift more from excess income and keeping detailed records, or making larger, lifetime gifts for which the tax liability falls away after seven years from when they were made. 

In addition, if parents decide not to fund their child’s student education and instead keep the cash until a later date, they not only lose that IHT exemption, but if the money remains in the estate, it is at risk of being exposed to 40% IHT. 

That said, student loan repayments should not really be driven by tax planning alone. The starting point should always be whether it makes financial sense in the first place, with any tax efficiency enjoyed as part of a wider, well thought through plan. 

Ultimately, paying upfront and directly for university costs wins from an IHT mitigation perspective because of the exemptions available, whereas retaining or redeploying capital can improve overall financial outcomes. So, in practice, the best approach may be a blend of exempt income planning and carefully timed capital gifting. 

While there is the option to try and mitigate the IHT liability on the lump sum gift with some mix of using the £3,000 annual exemption, phased gifting, or trying to qualify for the gifts out of normal expenditure, the clear message is to get on and make the gifts sooner rather than later. That way, you can start the seven-year clock ticking. 

*as per ONS House Price Index in the 12 months to March 2026 

**average mortgage rates, Rightmove June 2026