Should you help pay off your children’s and grandchildren’s student debt?
Many young people with Plan 2 student loans are struggling to pay off their high-interest debt. Here’s what to consider before helping loved ones repay theirs.
Plan 2 student loans have entered public discourse again recently due to high interest rates making it difficult for younger people to juggle student debt with the cost of living.
After facing significant public pressure, the government has now placed a 6% cap on student interest rates, which comes into effect on 1 September 2026.
While this benefits higher earners, the Institute for Fiscal Studies (IFS) has found that those with income under £52,885 won’t be affected at all by the new measure. It is also temporary, meaning the cap might not continue after the 2026/27 academic year.
If you have a loved one who is struggling with high-interest student loan repayments, you may be considering covering those payments on their behalf. But this might not be the best decision for you both.
Keep reading to learn how Plan 2 student loans work, how paying off your loved one’s loan could benefit your estate planning goals (as well as other ways you could support them), and how advice can help you make the right decision.
Plan 2 student loans have compound interest rates, meaning the debt could rise even while graduates are paying it off
The way that Plan 2 student loans affect most people is like an additional tax – 9% of the income students earn over the £29,385 threshold goes towards paying off their debt.
What’s more, Plan 2 student debt is also subject to compound interest rates, which charge interest on interest. This means that debt grows over time, making it more difficult to reduce. It could even mean that lower earners see their debt rise while they’re making expensive monthly repayments.
The rate of interest is based on the UK Retail Prices Index (RPI), a figure determined from the cost of goods, services, and housing. So, when inflation is high, student debt interest typically follows suit.
In July 2025, the Office for National Statistics (ONS) recorded that RPI reached 4.8%. Depending on their income, student debt interest can be as much as RPI plus an extra 3%, meaning that some students might have seen interest rates of 7.8%.
Paying off your loved one’s debt could help them with the cost of living and reduce your exposure to Inheritance Tax
If your loved ones are struggling with high interest rates, it’s understandable that you might want to step in and help offset some of their debt.
But it’s important that you do so in a strategic way and, before you act, weigh up your other options. Otherwise, you might miss out on the most tax-efficient and impactful way to help.
For example, paying off their student loan could benefit your wider estate planning goals by helping to reduce the value of your estate and its subsequent Inheritance Tax (IHT) liability. This is because debt payments on your loved ones’ behalf count as a lifetime gift. As payments are likely to exceed the parameters of lifetime gifting allowances, you could create a potentially exempt transfer (PET).
Learn more about PETs in our previous article: Giving while living: 3 reasons to slow down and make a plan.
Wiping out Plan 2 student debt is most beneficial if your loved ones are high earners
The income that your loved one receives can also determine whether it is sensible or not to cancel their debt.
If your child or grandchild is a higher earner, like a doctor, dentist, or solicitor, they would be more likely to pay off their debt.
Therefore, paying off their student loan either partly or fully could save them from high interest rates and a 9% charge on their income above the £29,385 threshold.
However, if your loved one’s income isn’t likely to cancel out their total debt over the course of their lifetime, it might be more beneficial for them to continue paying off their loan until the debt is forgiven 30 years after their graduation date.
Consider other ways to make financial gifts
If you find that reducing their debt won’t be as impactful as you had hoped, you could help your child or grandchild with other types of financial gifts, such as:
- Putting a deposit down on a first home
- Paying into a pension on their behalf
- Helping to fund nursery or education fees for grandchildren.
Remember that various moving parts, like variable interest and changes in income, can make it difficult to ascertain whether paying off debt on your child or grandchild’s behalf is the optimal strategy for their financial wellbeing and yours.
If you need clarity on what option is best suited to you and your financial circumstances, a Kellands financial planner can help.
Speak to us about helping the next generation
Our award-winning team can help you realise your options and choose the best possible route to transfer your wealth to your loved ones, whether that’s paying off their debt or helping them out in different ways.
We can also independently review your loved ones’ finances to offer specific strategies to help them eliminate their debt themselves, or build a comprehensive, bespoke plan to give them a head start on their financial future.
Contact us today by emailing hale@kelland.co.uk or calling 0161 929 8838.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
The Financial Conduct Authority does not regulate estate planning or tax planning.