Anger is growing about student loans. And not just among those repaying them. Parents, sitting with the uncomfortable truth that their university courses were free, are becoming more vocal.

The debate is complicated because there have been different loan schemes with different terms. 

The controversy centres on ‘Plan 2’. Several million graduates who started university courses between 2012 and 2022 took these loans in England - and the scheme still runs in Wales.

The issue is that the terms have changed, sparking a debate about whether it was really a loan or a graduate tax, as some feared at the start. 

The Institute for Fiscal Studies has just published a report arguing that it is the latter. It estimates that those who started courses in 2022, the latest start date for Plan 2, can expect to repay around £16,000 more on average than if there hadn’t been any changes to the loan terms. 

Around £3,000 of this comes from the freezes announced in the Budget in November.

Much has been said about Plan 2 and the debate will roll on. Instead, my focus today is a practical one, aimed not at that but at those in university or planning to go in the coming years - and the parents who may fund it. 

For those who have built a little wealth, there are options to consider:

1. Should you pay living costs for your child?

2. Should you go further and offer to pay the fees?

Given how the rules are changing, more parents may be considering how they can help. And the current media attention has brought the whole issue into sharp focus.

How student loans work today 

This is how the system works. University fees are subject to a cap, which was at £9,000 for a long time but has been rising. It will climb to £9,790 a year in England for most courses in the next academic year.

The current system, in force since 2023, is ‘Plan 5’. These are the basics:

· You borrow from the government’s Student Loans Company and don’t start repaying until you earn £25,000 a year.

· Repayments at 9 per cent of your income are taken from your wages, hence the perception of a ‘graduate tax’, when you reach the threshold.

· The interest rate is set on 1 September each year, using the Retail Prices Index (RPI) of the previous March. It was confirmed as 3.2 per cent for this year, down from 4.3 per cent last year. Note that higher rates apply for Plan 2.

· The loans cover the fees, capped at £9,535 and rising to £9,790 for 2026/27. But there’s also the option to borrow more for living costs - next year, up to £10,830 a year, or £14,135 for London students.

· Debts are wiped clean after 40 years (note that debt redemption is after 25 years for ‘Plan 1’ and 30 years for ‘Plan 2’).

Given the numbers, a large debt will accumulate alarmingly quickly. A London student could accrue nearly £70,000 of debt in three years, not including interest, and that’s before considering that fees and living costs will rise over the course of a degree.

Working at an investment platform, I come across customers wondering whether it is worth using their investments to pay the fees and fund living costs to help their child avoid the loans.

Should you raid your savings and investments?

The answer to this question comes down to whether the returns you earn will be higher than the cost of the debt, which rises with RPI inflation.

Both future returns and future inflation are impossible to predict but history can offer a reference point. 

So far this century, RPI has averaged 3.5 per cent, says the Office for National Statistics.

If this continued, you would need your investments to improve on that rate. So, what has happened before? 

The US stock market, which tends to be the most popular home for our money these days, has returned an average of 9.7 per cent a year since 1900, according to the UBS Yearbook. And it is worth noting that US inflation averaged 2.9 per cent over that period.

We can make a basic calculation on this: what would happen to £10,000 of debt costs versus £10,000 of investment based on a 3.5 per cent interest rate and a 9.7 per cent return. 

After 10 years, the debt would have grown to £14,183 while the investments would have reached £26,276. Even when we factor in investment costs of 1 per cent a year the pot would still grow to £23,794.

If your money were in savings, the result might be less favourable. Generously using the average UK bank rate of 3.6 per cent since 2000 as a proxy for savings rates (they are mostly lower than bank rate), our £10,000 would grow to £14,325, a smidgen ahead of the debt growth.

These numbers can never offer a view of the future, but they are worth considering. Returns have been less impressive in some periods. 

From 2000 to 2024, for instance, annual returns for global stock markets were more modestly ahead of inflation - an average of 3.5 per cent each year, the UBS numbers show.

If stock markets were to keep beating inflation in this way, then it would be better to stay invested rather than to pay the student costs upfront. 

And perhaps getting your child ahead in other ways may be more beneficial, such as contributing towards a property deposit 10 years down the line.

The wisdom of crowds

Another reason to take the graduate loans is the safety of the crowd. 

A few years ago, the US government wiped out student debts for those who still owed money after 20 years. That is a distant hope for British graduates today. 

In fact, successive governments have worsened the terms. 

But the backlash - which will likely grow - underlines the nagging concern people of all generations have about saddling young people with debt and it lessens the chances that terms will be worsened again. 

And one improvement, in particular, seems possible - switching the loan rate from RPI to the Consumer Prices Index (CPI), which tends to rise more slowly.

There is another roulette decision. There’s the possibility that your child’s career is not lucrative; that they remain under the threshold and any remaining debt is cleared after 40 years. 

However, this is looking increasingly unlikely. Note that the £25,000 salary repayment threshold is not that far above the annual minimum wage of £23,132 for a 35-hour week from April and is lower than the £26,436 for 40 hours.

The tax consideration

There is also inheritance tax to consider. There are fiddly ways to give money to your children such as gifting a total of £3,000 a year, or you can gift more from excess income and keep detailed records. 

For other gifts, the tax liability falls away after seven years from when they were made. But payments for university fees, accommodation and living costs from parents for full-time students are exempt from inheritance tax.

That is a consideration for some, especially with the inclusion of pension assets for inheritance tax from April 2027. 

Many more people will face potential liabilities and will be looking for non-fiddly ways to hand money down.

How will you help?

The student debt row has shone a light on the powerful effects of compounding - how the repeat effect of interest accruing on interest, month after month, leads to a mountain of debt. 

When the interest rate is up to 6.2 per cent, as it is on Plan 2 this year, debt can spiral. 

Plan 5 takers, at least, can twist the power of compounding to their own benefit by investing and earning returns on their returns.

Either way, it seems likely that students are destined to leave university with debts unimaginable to the generation before. 

I am grateful that I left college with modest debts. I was among the first students to take a student loan but only to cover living costs. 

The amounts seem trivial compared to today’s. I’m grateful for the top-ups from my parents and the support when I needed to live at home to save money.

My generation - today’s parents - want to do the same: to be able to help their children in the most powerful and cost-effective way. For me, investing to help with a house deposit is the answer.

Andrew Oxlade is a director at Fidelity Personal Investing, a former This is Money editor, and writes a regular column for This is Money on investment and financial planning.