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DS has inheritance & could cover uni fees. Why should he still get a loan?

(95 Posts)
SadAboutTheBoy Thu 19-Apr-18 11:13:31

DS is very fortunate and has a lump sum of inheritance saved/ invested which could more than cover his uni fees and living expenses over the next 3 years. (He knows he is very very lucky in this respect.)

He is going into a field which is likely to be high paid (IT/computing) and all the online calculators suggest that he probably WOULD end up paying all his loan back.

At the moment his savings/investments earn probably a little less than 6% a year, due to the balance of savings accounts and ISAs etc.

In my mind, it is madness to borrow money at 6% and be earning less than that from your savings? But people who are aware of his situation keep saying he should still apply for a student loan (but seem unable to explain to me why...)

Even if he was to pay them off as soon as he graduated, it would still have cost him 6% p.a. in accrued interest?

Using his inheritance wouldn't totally deplete his savings either. He'd still have a lump sum left if he wanted e.g. a house deposit in the future.

Am I missing something here?

akkakk Thu 19-Apr-18 11:17:31

You are not missing anything - the loan is for those who have no other option - if you borrow at a higher interest than your savings are receiving you are simply throwing away the difference...

It used to be (20+ years ago), that interest on student loans was low enough to borrow the money even if you didn't need it - stick it in savings and make a profit! Those days are now gone...

SadAboutTheBoy Thu 19-Apr-18 11:36:06

akkakk - yes, well, that's exactly what I think, but people still seem to be sucking in their breath and spouting generalisations such as 'it's not quite as simple as that" but then being unable to explain what they mean!

The only scenarios I can imagine in which it would make sense are for him to get the loans are in case of him being injured and unable to work, or moving abroad, or becoming a low/not paid houseperson in the future. None of those seem particularly likely.

akkakk Thu 19-Apr-18 14:17:18

people still seem to be sucking in their breath and spouting generalisations such as 'it's not quite as simple as that" but then being unable to explain what they mean!

all that should do is confirm that those people haven't a clue what they are talking about smile

life is full of very vocal people who spout off rubbish which doesn't make sense, but social and other media picks it up and it becomes folklore / the 'approved' method...

it is very simple - if he wants uni - sit down with him, do the maths (I trust he can cope with %s smile) and it is a good opportunity to teach him some basic finances...

OutrageousFlavourLikeFreesias Thu 19-Apr-18 14:39:31

If he takes the loans and holds onto his inheritance, he'll have a house deposit all ready to go as soon as he's ready to settle down. If he were to save the £ he would have paid back towards his loan, he might be waiting much longer to buy his first house (and have to save more if prices go up).

I don't know if this is enough to offset the interest on the loans or not. But it's one reason I can think of why it might make sense to take the loans and save the £. Only might, and I'm more than ready to be proved wrong by someone who's actually crunched the numbers.

titchy Thu 19-Apr-18 14:40:11

None of those seem particularly likely

But possible.... he might also choose to work part time, or travel or be a SAHD. He might hate it and drop out, or find God and become a vicar. He might end up in a low paid job (contrary to popular belief computing/IT isn't that well paid - there's an over-supply in many areas, and every Tom, Dick and Harry can code).

You don't say how much would be left over if he paid up front? Is it enough to buy a house in London for example?

If he pays upfront the money's gone regardless of what job he gets, and whether he actually graduates. If he takes a loan he can always choose to pay in back in one lump sum if he does end up working in a highly paid area. Taking the loan gives him options and a flexibility that paying up front doesn';t give him.

sheddooropen Thu 19-Apr-18 14:55:37

I know lots of new graduates and unless you are a millionaire then you might as well take out a loan as most people never pay off the loan and it's wiped off after 30 years and if he earns enough money soon then he could always pay it off, unless he has savings of over £100,000 you may need the loan. Its £27,000 at least for fees unless the fees have gone up again and then living costs anywhere between £20,000 to £30,000 for the 3 years unless you are in London so you might as well take the loan if he can

Namechange128 Thu 19-Apr-18 14:55:47

If he's earning near enough 6% and would have interest of 6% then if he takes the loan it will not cost much extra Vs paying off directly. However, having a large lump of cash handy can be very useful. As pps have said, it could be a house deposit, or he could start his own business - all sorts of things that he may not be able to access a similar size loan for.

Is he reliable with money? If not then paying it off is more sensible than risking him spending it all on partying or ill advised startups , but otherwise I'd take the loan.

Bekabeech Thu 19-Apr-18 15:12:28

Wouldn't he be better buying by a "buy to let" property and taking the loans. He could well earn more than 6% with both rent and property value increases.

frenchfancy Thu 19-Apr-18 15:20:56

The reason most people don't pay their loans off is because the interest acrues when pare not paying - so once they start paying they are paying off the interest first. Someone who borrows £50k , pays back £75k but still has some owing when it is wiped off will be down on the figures as not having paid off their loan.

Don't borrow mon unless you have to.

KeneftYakimoski Thu 19-Apr-18 15:21:31

If he takes the loans and holds onto his inheritance, he'll have a house deposit all ready to go as soon as he's ready to settle down. If he were to save the £ he would have paid back towards his loan, he might be waiting much longer to buy his first house (and have to save more if prices go up).

This. I could have paid my children's fees and maintenance loans (ie, paid the fees and funded all their maintenance, rather than two thirds of it).

I didn't, because that same money is the deposit on a house, or funding post-graduate study, or whatever, and I don't have it twice.

Taking the loan is choosing liquidity, and the price of doing so is small (a few percent over RPI per year on fifty grand). If I/they change my/their mind, I/they can pay the loan off at any point and all it has cost is the interest for the intervening period less the return on the borrowing less a notional benefit for the liquidity, which is a small enough amount of money to not worry about. If it turns out that they're not likely to repay, they can continue to make the income-related payments.

When they're in their mid-twenties, we'll all have a better view of their educational, housing, career and income prospects, and can make a more nuanced decision. Neither is now looking to pursue the same career plans on the same timetable as they did at 18, so I'm very happy with the decision.

The basic choice is between having capital available in your twenties, versus increasing your lifetime earnings by not making repayments through your working life. Whether you regard fifty grand available when you are 22 as being better or worse than paying a couple of thousand pounds per year over your working life is a matter of taste, but I am relatively confident that in today's housing and education market, capital now is worth more than income later.

itsbetterthanabox Thu 19-Apr-18 15:29:13

Buy a house now with it. Either buy to let or buy and live in plus other student tenants.
Then get loan. Much better off long run.

CuntPuffin Thu 19-Apr-18 15:34:52

Have a look at MSE. He strongly advised against paying upfront for a range of reasons.

To me, it sounds like there is sufficient inheritance that he could put down a decent deposit on a student flat, and rent the other rooms. Or buy a BTL somewhere. He is of a generation that is going to find it nigh on impossible to buy a property without inheritance and it would be a shame if he lost the ability to do that by paying fees in advance.

mydietstartsmonday Thu 19-Apr-18 15:35:12

I would be tempted to keep the lump sum for a deposit on a house and take the loan. He will be paying it back at some point especially if he will be a high earner. You give him choices and it is much harder to save up a bulk amount then pay a loan off gradually.

RB68 Thu 19-Apr-18 15:40:37

I would look at another investment and use it to earn money to live off and hopefully also acrrue more value - so for example a decent house with rooms to rent out to others/flat share with. One room would be tax free on the rent a room scheme so maybe a two bed place, but if he was happy to go into being a landlord a bit more he could purchase a larger place use the money to deposit/buy with yourself as guarantor for the mortgage and pay mortgage etc with rentals. If he took the loans and used the inheritance that would be a substantial sum to start with property investment. You do need to be careful with the purchase and make sure its in the right place, kept up maintenance wise and he is sensible re who is in there with him

KeneftYakimoski Thu 19-Apr-18 15:42:25

If you can predict your life with accuracy, the difference between capital and income is a simple net present value calculation.

As anyone who has attempted to do the cost case for long-term capital investment will know, it isn't that easy, and the costs, returns and opportunity costs are increasingly hard to calculate over longer periods.

The choice to pay your student costs now versus take the loans is thirty year calculation. The uncertainty is impossible to reason with.

Keeping the capital at worst means that as you approach 50, you haven't earned quite as much as you might otherwise have done.

But at best, keeping the capital gives you the ability to do things you otherwise cannot afford.

The basic question is: looking back on your life, would you prefer to have been given £50k at 22, or £100k at 52? Most people, I suspect, will choose the former.

sashh Thu 19-Apr-18 19:32:33

If on the last day of term in his final year he has an accident that limits his working ability then he has lost a lot of money that could make a huge difference.

If he doesn't get a job he will not be paying back a loan, this means he can take a gap year or an internship and use some inheritance for that.

Has he got a pension set up? Putting in money now will give the biggest benefit for investment because of the time between now and retirement.

Is he doing IT or computing? There is a huge difference in the skills needed for a good job and an IT degree.

Keeping his inheritance will allow him to retrain if he wants a different career, is available for any health issues etc. Take the loan.

BubblesBuddy Thu 19-Apr-18 23:21:49

Will £60,000 get you a buy to let in a university city? This amount won’t be much of a deposit in London. Sadly. However, take out the loan and keep the inheritance for flexibility. Lots of computer grads don’t get well paid jobs. There are huge numbers chasing the jobs.

Userplusnumbers Thu 19-Apr-18 23:27:21

The thing is, if he's currently earning a 6% return and reinvesting, in around 12 years, he'll have doubled his money due to the compounding. The loan interest isn't compounding, so you need to factor in those losses when making it. Ultimately if he takes it, then changes his mind in the future, he's still got a lump sum with which he can pay it back.

Userplusnumbers Thu 19-Apr-18 23:29:11

*taking it, not making it.

It's also the reason rich people and businesses are happy to carry debt knowing that their investments are going to outstrip the cost of it anyway.

starzig Thu 19-Apr-18 23:38:26

Some people see it as the done thing. Many students (though not all) take out these loans and start buying top end computers, cars and generally wasting the money rather than just taking what they need for fees and getting a part time job for the rest.

Mumoftwoyoungkids Thu 19-Apr-18 23:48:07

I did further maths A level in a class where we were seen as incredibly high fliers the likes of which school had not seen before. 8 of us. 6 As, 2 Bs.

If you were going to bet on 8 people to do well then we would have been the ones to do it on.

All 8 of us went off to our Russell Group STEM degrees.

Only 6 completed their degrees. 1 failed second year. One dropped out due to mental health issues.

1 of the ones to complete also found God at university and is now a vicar.

The other 5 are working in STEM based careers although at least one (me!) only works part time.

People change and life happens.

BackforGood Thu 19-Apr-18 23:49:38

I agree with Titchy and others.
What a schoolboy thinks he is going to do 'after university', and what you think he is likely to earn, is absolutely not a certainty that they will.
101 things can happen.

If buying a house where he is going to study / letting out rooms to friends is a realistic possibility, that sounds like a strong plan, but if not, I'd at least wait until the end of the degree, and until he has definitely got this wonderful, high paying job, before looking at the possibility of using up a huge sum of money like that.

KeneftYakimoski Fri 20-Apr-18 00:01:10

What a schoolboy thinks he is going to do 'after university', and what you think he is likely to earn, is absolutely not a certainty that they will.

I know the range of jobs, and incomes, flowing off the end of a top-rated STEM degree at a top-rated university. I know the troubles that students have, the delays in graduating, the sharp changes in career aspiration, the decisions to become school teachers and vicars and folk singers, to go abroad and teach in English, the changes of programme...

I think any who says up front, before their child starts university, that they are sure to graduate into a high-paying job is guilty of not only counting the hens in advance of the eggs being laid, but of building a gold-plated, diamond-encrusted counting machine to do it.

Ariela Fri 20-Apr-18 00:27:37

Is the inheritance enought to buy a property outright in his chosen Uni town with enough rooms to rent out 2? If so, it might be worth looking at buying the property, income from the rented 2 rooms for 3 years would be a better return on his investment, then sell once he's graduated and got a job probably elsewhere, meanwhile getting a loan only for the fees.

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