Student loans are a means by which young people can access more advanced education options, but they come with a long term commitment and decades of repayments that function less like debt and more like an additional tax on working life.
That observation matters beyond education policy. It opens up an under-explored conversation about inter-generational tax planning, inheritance tax (IHT), and whether lifetime gifting to children could now serve a dual purpose: easing the graduate “tax” burden while reducing parents’ future IHT exposure.
Holly Algar, Senior Associate in Thrings’ Private Client team, looks at the challenges facing students today and what parents can do to help relieve their burden.
The impact of student loans
UK student loans are unusual and complex. Repayments are income-contingent, collected through PAYE, and for many graduates extend over 30 to 40 years. At 9% of earnings above the relevant threshold, they operate much like an extra marginal tax rate on work. For higher earners in particular, loans are likely to be (eventually) repaid in full, often with significant real interest.
This is not simply a lifestyle debt; it is a long-term fiscal drag. At the same time, inheritance tax is affecting more families than ever. Frozen nil-rate bands, rising asset values and tightening reliefs mean that estates once considered comfortably below the IHT threshold are increasingly exposed to a 40% tax charge on death.
Against this backdrop, lifetime gifting is fast becoming a sensible consideration for many parents.
What can parents do?
Bringing these two issues together leads to an interesting proposition. For parents who can afford it, making lifetime gifts to help children reduce or eliminate student loan balances may be tax-efficient for both parties. From the parent’s perspective, outright gifts are typically treated as potentially exempt transfers. Provided the donor survives seven years, the value falls outside the taxable estate altogether.
Alternatively, parents could make regular payments to their children out of surplus income to help pay off these loans and these regular payments are immediately exempt provided they meet the “normal expenditure out of income” rules.
For the child, the benefit is immediate and measurable. Reducing a student loan balance lowers future interest accrual and effectively cuts a lifetime marginal tax rate on earnings. The result is higher net income over a working life.
This approach will not suit everyone. It is most compelling where the child is likely to earn consistently above repayment thresholds and remain within the UK tax system. Conversely, graduates who may never repay their loans in full, or who expect to emigrate, may see less benefit from early repayment. Parents must also weigh opportunity cost, loss of capital control and fairness between siblings.
Nevertheless, the broader point stands. Student loans have become a defining financial feature of modern life. At the same time, inheritance tax planning is shifting earlier, and could become more focused on supporting the next generation while they are economically active.
As such, lifetime gifting to mitigate student loan repayments deserves a place in the conversation, reframing generosity as strategy and recognising that, in today’s tax environment, the most effective inheritance planning may happen decades before inheritance is ever due.
At Thrings, our Private Client lawyers combine local knowledge with practical legal insight, working closely with our teams across the firm to give individuals, couples and families the holistic support they need to make confident, informed decisions for the future. Get in contact to find out more.