'Rich students save by paying fees up front'

[QuietContraryMary]

Lol

www.bbc.co.uk/news/education-46866346

'The wealthiest students are going to university in England for the lowest cost, by paying their tuition fees up front, say researchers.

About 10% of students are not taking out loans and so avoid interest rates of 6.3% paid by other students, says the Intergenerational Foundation.'

'Interest charges begin to build up as soon as a student begins at university - and about £6,000 can be owed before a student even graduates.

Those paying up front will leave not owing this money - and they will not be part of the repayment scheme paying back loans over 30 years.

This will give self-funders a "serious economic advantage" when they leave university, say researchers.'

This is rather silly.

Firstly the interest rate is only 6.3% during the course, or if you are on high earnings. If you are on very high earnings then your debt will get repaid. If you are on low earnings then it will never be repaid and the rate is any case only 3.3%, so the rich students never saved anything, since, well, you got fees + maintenance loan and you never paid them back, whereas they paid for them out of pocket.

The issue really isn't with the 6.3%, but with the fact that if you can pay for fees up front you have lots of money, which is hugely advantageous quite irrespective of university.

[NaughtToThreeSadOnions]

Wow rich people have an a finacial advantage what a suprise. How long did it take the researchers come to that conclusion?

Sorry, but surely its just like buying something up front or requiring credit to buy it. Those that can afford to buy something upfront will do so, and not have any repayments to worry about. Those that require credit have to repay that money.
Paying up front is always better. Not cos its "cheaper" their still paying the sane amount its just they dont have to pay any intetest because they havent borrowed anything. They havent borrowed any thing because they dont need too.

Also surely its a case of some of the richest students are those from abroad, who arent entitled to loans any way.

[jeanne16]

Quitecontrary. It is not as silly as you think. I agree if you are going to be a low earner all your life, then you will pay nothing back or only a small amount. If you are a high earner, you will be charged 6.3% while working but will pay the loan back quite quickly, but will still pay a fair amount of interest.

Actually the ones who will really pay a lot are the middle earners. They will pay an extra 9% over 26k for 30 years! I keep hearing people say it is ‘just a graduate tax’ but can you imagine if the rest of us were faced with a 9% tax increase? Would we be ok with that?

So yes, unless you are going to be a low earner, it is better to pay fees upfront.

[titchy]

but can you imagine if the rest of us were faced with a 9% tax increase? Would we be ok with that?

Maybe do a bit of research on historic income tax rates.... they were more than the current basic plus 9% some years ago. And yes everyone was ok with that.

[unlimiteddilutingjuice]

I don't get it.
I always thought student loans were charged at the rate of inflation. So, theoretically there's nothing to be gained by paying off early.
Why aren't the rich people investing the money in something more high yield, paying off later and keeping the return?

[CottonTailRabbit]

Rich people have options which allow them to choose cheaper ways of doing things. Shocker.

I used to be poor. Am now comfortable. I can buy stuff cheaply because I have space to store it and can spare the cash now.

Money = options.

[NaughtToThreeSadOnions]

So yes, unless you are going to be a low earner, it is better to pay fees upfront

But thats the case with anything. Is it better to buy something outright/upfront or get a loan/buy it on credit.

Of course its ultimately better/cheaper to not take out credit to pay for something and pay for it up front. Surely thats logical. So yes those that can afford to do that are going to be better off than those that pay for it without interest. Surely having a bit of research to tell you that is silly

[Racecardriver]

Well at least they pay. Many people never repay their student loans.

[Racecardriver]

@jeanne16 it’s not a tax though. It’s a repayment of a loan which the government gave quite generously (given that most undergraduates have no chance of securing that kind of loan at a reasonable interest rate themselves). Should the government just stop providing loans? Government offers cheap loan. Students accept. Students then pay it back. Where is the tax?

[senua]

Why aren't the rich people investing the money in something more high yield
What investment is paying a surefire 6.3%, after tax? Do tell.

[unlimiteddilutingjuice]

Oh hang on..

I get it now. The interest rate after graduation depends on income. Its only worth prioritising paying it back when it gets higher than the rate of inflation.

6.3% is the higher rate and is higher than inflation. So for people that are (or expect to be) high earners it does make sense to pay it off.

Not necessarily worth it for other folks.

Thanks Martin Lewis

[QuietContraryMary]

The 6.3% would appear to be bite people on middle incomes, so it really depends on what you are doing.

If you graduate with £60k of debts, then if you are on less than £25k you don't pay anything and the loan never changes in value

Above that it varies, but if you are progressing to a lucrative job then you will be penalised.

The RPI interest is £1980, and £1980 / 9% (repayment rate) = £22,000, and with a £25k repayment threshold that means that if your salary will never go above the equivalent of £47k (as the repayment threshold is uprated with wages), then more-or-less you will never repay the loan (disregarding of course that RPI will vary from year to year)

The point comes that if your wages are on a pathway to a higher level, then you will be racking up fairly big debts that the government will want back off you in the future. For instance, if you earn £45k as a graduate then your debts are in fact INCREASING because it's rpi + 3%. So your debt is compounding at 3% real terms, and as a future lawyer on, say, £150k, you will be paying back a rather expensive debt, in full.

The point here is that the penalty is only incurred IF you are a future very high earner, AND you are currently a high earner. So if your graduate salary is £45k in a high-flying profession, then:

(a) rich person, no student loan - can look at investments, buying a house, etc.
(b) average person, full student loan - should pay off their student loan

The result of this of course is that, say, the City lawyer from a rich family at 40 has a much fancier house than the one from a normal family.

It's hard, of course, to shed a tear for a graduate on £45k - if you are single and have a takehome of £34k, well the government would be happy if you stuck £15k into paying off your student loan.

But clearly that money that they are encouraging to repay has an opportunity cost, be it investments, private school for your own kids, or whatever. And clearly some part of that could have future effects in for example concentrating privilege (i.e. the very highest paying jobs) in the hands of those who already have money.

But it's not what the BBC article says, at all.

[EdithWeston]

Remember that the government has considerable schope to alter the T&Cs, And interest rates change - they have been very, very low for years now, so the only way is up.

And yes, people have paid considerably higher rates of income tax on the past. So yes, in the future we might all have to handle that. And graduates 'repaying' their loans will still be paying for that in addition.

I put repaying in inverted commas, because it's not like repaying any other kind of loan, as you cannot pay it off in the same way

[QuietContraryMary]

you can certainly pay off your student loan like any other if you wish; the difference is that you have the option NOT to repay it, by not earning much money.

I suspect the government will not make major changes to current terms, what will happen is that there will be some future scheme for new graduates which could be worse.

Repayment thresholds are uprated with income inflation, but I guess that could change in the future so you end up with a freeze which brings more people into scope.

[WombatChocolate]

I think that a number of parents who following advice, got their children to take loans (who could have afforded to pay up front) now wish they hadn’t.

From the time of taking the loan until graduation, the increase in debt size, due to interest was sizeable. And now working in decent paying graduate jobs and making the monthly payments, the total debt is still high. I’m pretty sure I’ve heard people say the total debt is still growing as the interest exceeds what they are paying off.

When people were told minimal interest rates they had no idea of interest rates above 6% or the impact of such an interest rate. They took the loans because everyone said it was daft not to take what was almost a free loan, which might never be paid back anyway. But lots now find their kids saddled with a bigger debt than they’d realised and wish they hadn’t taken the loan. Perhaps they failed to fully understand .....but lots of well educated people did, suggesting the info wasn’t entirely clear perhaps.

Agree with general principle that if you can pay up front, you save money by doing so.

Also recognise that although parents might be able to pay fees up front, many have decided they are prepared to pay the living costs but not the fees, and it’s far rarer for 18 year olds to have the funds for fees upfront even if parents do.

I guess parents could pay upfront and organise repayment from their kids interest free- but difficult, especially if you need the money repaid and timescale of their future work and earnings is unclear.

[Ariela]

I disagree, I reckon it's more likely grandparent funding: thus it advantages parents where elderly grandparents soon to die decide to pay tuition fees for grandchildren rather than their beneficiaries losing out on inheritance tax.

[titchy]

They're not 'saddled' with a debt though wombat. If they don't earn enough they don't make any repayments - no risk of a debt collector turning up to collect missed payments. And the repayment is the same regardless of whether £2k or £72k is owed.

Parents who could have afforded to pay upfront would always have been much better advised to save the money and give it as a deposit for a property once offspring are earning, and that's still true.

[WombatChocolate]

The repayment might be the same, but the amount they owe has grown so they will be paying for longer.
I know some will never pay any back or only part. I’m not thinking about them particularly but those who do start paying pretty quickly and the impact on them and the impact over the long term. It’s not the close to free money people think they are getting and considerably more costly than they realise and often than parents realise. And I think more would make alternative financial arrangements if they fully grasped it or realised how parents or children a few years further down the line feel about it.

[QuietContraryMary]

"I think that a number of parents who following advice, got their children to take loans (who could have afforded to pay up front) now wish they hadn’t.

From the time of taking the loan until graduation, the increase in debt size, due to interest was sizeable"

Tbh if you can afford to fork out £60k as a discretionary payment then you can afford the interest on the same. Yes, the loan grows during study, but it's hardly a a deal-breaker

[jeanne16]

QuietContraryMary. People may be able to afford the interest on the loan if they could pay the 60k upfront but that is surely not the point. We are in a good financial position because my DH and I have both worked extremely hard over the years and earned decent money. We have also always made sure our savings are invested wisely etc, to make our money work for us.

We have paid my DDs uni and are paying for my DS because it would make me ill for anyone in my family to have a debt increasing at 6.3%. My DD has ended up with a well paying graduate job and she would be making significant payments in student loans if she had a loan. Instead she is saving money towards a property. Btw, anyone who can find an investment paying more than 1.5%, please tell me!

My DS should also end up with a well paying job post uni. However if I had thought neither would ever earn very much, then it is best to take a loan and never pay it back. To me that seems a rather pointless reason to go to uni, but that is another issue.

[donajimena]

I'm a mature student so no wealthy parents to put into the mix. When I graduate I'm looking at a starting salary of around 30k. Potential top salary in my field is around 100k but I'm probably going to be too old to progress to that. Before deciding to study there is no way I could have expected to earn much above minimum wage, so although loan repayments will sting I have to remember that overall my life will be better as a result of 'investing' in my education.

[WombatChocolate]

I agree that for most it is worth incurring the debt to get a degree. I also agree that if the loan is the only way to fund it, as it is for most, it needs to be taken. However I also think 6.3% interest is high especially when compounded over 30 years and it’s regrettable people have to pay that too and not something which is a nothing in deciding if to have a loan or not. Lots who could have afforded not to take the loan, did so as they didn’t understand the impact of the interest rates - that’s all. Not saying people shouldn’t take the loan at all.

[titchy]

Jeanne if you'd given your dd £60k once she'd got her first job she'd be on the property ladder now with loan repayments of what, £200 a month, if you expect her to repay in full.

Whereas she's saving £200 repayment and putting that towards a deposit - that's years of saving but wasting money renting and years of paying landlords mortgage.

[ReflectentMonatomism]

"I think that a number of parents who following advice, got their children to take loans (who could have afforded to pay up front) now wish

We could have afforded to pay the fees (times two) or to have the money available for a house deposit slash PhD slash law college slash whatever, but not both.

We are perfectly happy with the decision to have our children take the loans. We might take over the repayments, or (when the dust has settled) pay them off. But in the medium term, the cost of liquidity is valuable.

I don’t think that we on the left have exactly covered ourselves in glory by campaigning on student loans. As is seen in Scotland, a tightening in availability of funding means that diversity of intake drops, while a misplaced fear of “debt” has a similar, but smaller, effect in our setup. It’s hard to escape the conclusion that the main objections to student loans come from middle class families annoyed that what was previously a handout for Jemima and Henry (the beneficiaries of the previous system were overwhelmingly middle class) has been taken away from them.

The current system means that newly graduating students are paying a lower combined rate of tax than I paid when I started work in the mid 1980s (30%? 33%?). If students would like to have free university education a la 1980s (and the grant system was nothing like the bonanza that is pretended, particularly if your parents were both working) then would they accept the income tax rates of the 1980s as well?

[ReflectentMonatomism]

We have paid my DDs uni and are paying for my DS because it would make me ill for anyone in my family to have a debt increasing at 6.3%. My DD has ended up with a well paying graduate job and she would be making significant payments in student loans if she had a loan. Instead she is saving money towards a property. Btw, anyone who can find an investment paying more than 1.5%, please tell me!

So instead, she could have taken the sixty grand from your in cash, used it as the deposit on a house, and be paying a mortgage and a few hundred quid a month in loan repayments. Explain to us how that’s a worse position than having no student debt and paying rent while saving the same couple of hundred quid for a deposit?