My three daughters have a combined £205,000 in student loans – should I pay them off or invest the cash?

I have three daughters. One has finished a three-year degree and has £45,000 in student debt.

The other two are undertaking five-year courses – one is in her first year while the other is in year two. Their debt is expected to exceed £80,000 each. All three are on Plan 5 loans.

My wife and I are in the fortunate position where we could cover all of their fees, if we choose to.

We decided on asking them to take out loans for two reasons. First, to get the girls engaged with their own finances and responsibilities. 

Second, I was confident that I could grow that amount of money by more than the level of loan interest charged, which is the retail prices index (RPI) measure of inflation, currently 4.1 per cent this tax year. 

I planned to do this by keeping it invested in a global tracker.

This has proved to be the case over the three years daughter A has been at university.

However, I’m conscious the market has been riding high and this may not work for much longer.

My wife and I already use up all our Isa allowances each year, therefore the money would come from a dealing account which is subject to capital gains.

We could also take it from other taxable sources.

We already contribute £300 a month into each of the girls’ own Isas and all of them now have significant savings, which they have not needed to use yet.

Should I pay off the existing loans and ongoing costs for the two who are still in university?

Or should I gift the money to the girls and give them the option of either paying off their loans or investing it? 

I could also keep the money and let them pay the loans off themselves when they start earning over the threshold.

Grace Whalley, chartered financial planner at The Private Office, says: You are fortunate to be in a position where you can ask this question, but I don’t think this is purely a maths exercise.

The first issue that stood out for me is that one daughter has £45,000 of student debt, while the other two are on five-year courses and are likely to accumulate debts of more than £80,000 each. 

If fairness is important, that needs to be factored into any decision you make.

My initial instinct would be to lean towards your second option: gifting the equivalent money to your daughters and allowing them to decide whether to pay off their student loans or invest it instead.

The reason I say that is because one of your original objectives was to get the girls engaged with their own finances and responsibilities.

By giving them the money and having a detailed conversation about the implications of student debt, investing and future goals, you’re continuing that education rather than simply removing the decision altogether.

Of course, this is only a sensible option if you are sure you can give them the money without affecting the financial future of you and your wife. 

It is important to make sure you have enough to enjoy your preferred lifestyle now and in retirement.

Your daughters are all on the Plan 5 student loan, which applies to those who start courses after August 2023. 

They have to pay 9 per cent of their earnings above the repayment threshold of £25,000 a year over a 40-year period.

Whether paying it off makes financial sense depends largely on your daughters’ future earnings. 

If one of them is likely to enter a profession with a high salary, clearing the debt could make a lot of sense.

Equally, if another daughter takes longer to qualify, works part-time or takes career breaks, the outcome could be very different. 

They may find that – like some graduates – they would never fully repay their loan before it is written off after 40 years. 

If this was the case, your money would in part go towards paying off a debt that never needed to be repaid.

Giving them flexibility allows each daughter to make a decision based on her own circumstances.

One may decide to clear the debt immediately, while another may prefer to retain the money as a future house deposit or keep it invested in an Isa so she can review her position later when she has a clearer idea of her career path.

What I would avoid is the final option – doing nothing.

You and your wife are already using your own Isa allowances and are building assets outside tax-efficient accounts. 

From a family wealth perspective, there is a strong argument for moving assets down a generation while your daughters are in their 20s and 30s, when the money is likely to have the greatest impact on their lives. 

In addition, this could reduce an inheritance tax liability at a later date.

In my experience, many parents would rather see their children benefit from their wealth when they’re buying homes, building careers and starting families, than leave them waiting until much later in life.

So gifting to them now in this way keeps things fair and encourages financial responsibility.

It also recognises that each daughter’s circumstances may ultimately be very different.