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Repayment of loan(17 Posts)
We are unsure what to advise DD to do. She is a pre 2012 student so has the loan where repayments are calculated above a salary of circa £18,300 at 9%. She’s self employed and a high earner. She has a flat and we have given her a substantial deposit for that. We have an interest only mortgage on our house to fund the difference and we expect her to take out a mortgage when she has enough accounts to satisfy mortgage requirements. She also has further savings we have accrued for her. I am very confused by MSEs advice on repaying student loans and pre 2012 loan advice is difficult to find. Her loan has now gone up to £26,000. She could easily pay it off. Should she? She’s 26 and just about to complete her first year of being self employed.,
The crucial factor is the actual interest rate. If it's just 1.5% then how does it compare to your/her investments? If you're earning more in interest, then don't pay it off.
Mine have no student loans as I paid so I am not going to be giving a typical response, but I think the psychological effects of having these loans if you are a high earner is such a drain that that is part of the issue too.
If she owes £26k but the amount is based no 9% on salary over the threshold if she were on a lawyer's pay of £100k in London that would be about £80k taxed at 9% so paying about £7000 a year. £26k invested does not earn much even in an ISA these days. I would just pay it off and be done with it unless she expects to stop all work for 30 years or never earn much - plenty of women sadly end up like that even today and happily rely on a husband's money . She might fall ill and never work or might end up earning very little or go abroad and open a ban and never earn over £10k or something though so that's the risk if you pay. i don't think there is a risk the state will choose to write off all loans but I do believe there is a big ticking time bomb over student debt. I have read 2 articles recently - i think one was in the Guardian about US graduates with huge debts and how they affect their lives although that is a different system.
I have this issue all the time having funded 3 and now the last 2 without debts at university.
I agree with Xenia. We are funding/will fund ours and people are incredulous and say but they won't pay it back ever. Well, actually we hope they will be earning well enough that they will. I would rather the money was in their pockets and they weren't seeing it disappear monthly like my oldest did (until we cleared it). (And yes we are know we are lucky enough to afford to do this and yes we will be helping with a house deposit for each of them too. It wasn't a case of either or. If it were I suspect we may go deposit route).
(Apoloiges for my many typos... opening a ban was supposed to be opening a "bar").
They are certainly not simple sums to do and most parents and their children have no option but to take the loans so it is a nice dilemma for some of us to have being able to afford to pay it off or ensure they take none out.
We could have done all of that but we didn’t. We didn’t really know what her earning prospects would be. She did MFL at university. She has therefore studied for 4 years, then done the GDL, then BPTC, then pupillage so there are several years of paying nothing off! As a self employed barrister, earnings should remain good. Becoming a barrister is high risk and many fail. Therefore paying up front didn’t seem best use of money. The investments have also stayed invested for longer and made £££ by doing that. We have given her around £300,000 for course fees, living expenses, flat deposit etc so it’s just the university fees that are outstanding.
Self employed is key though because she could put money into a pension rather than pay off the loan. As a 40% tax payer, this is a good way to invest. She also has expenses to take off her gross earnings. So she won’t be taxed on everything she earns. Paying it off and not continuing to work would be a disaster!
Having read further monetary advice since I posted, there is no one saying pay it off due to the belief the money is better used elsewhere. The interest rate of the student loan is low of course so the 40% input from the govt regarding the pension is attractive. Being self employed does alter the game somewhat. We are advising her to take advice through the Chamber’s accountant.
Using an accountant sounds a good idea (and I have lost faith in pensions due to the many changes to those in recent years although I will be a minority view on that).
Sadly most professional women even barrister marry someone who earns more and go part time or stop working when babies come. I think it's most even today and it causes me massive pain in my soul everytime I see that but it's true. So whilst women earn more than men at under 30 in the UK it then utterly changes. I hope she and my daughters can be the exception and perhaps it will all change but that is something for people to think about who have daughters particularly in families where women don't work
Well I do agree with a mixed portfolio when heading towards retirement due to pension capping but she could make a start to pay less income tax!
What convinced me to let dd take the loans is all of the above, plus knowing her, after finishing her degree, she is quite likely to go off to Africa for 30 years and look after stray dogs for nothing. If she does earn lotsa but not masses of dosh, later on we can see how things stand and help out maybe.
My kids have loans.
They are not a "loan" - they are a 9% graduate tax
really high earners will clear it in less than ten years
low earners will never repay them
on average 45% of the balance gets repaid
I am not going to subsidise the loan system by even one penny - I've adjusted my dividends to max out my kids loans
but I will help them to buy houses
seems better than paying of loans - even with the rate being 6% at present
Pre 2012 loans are not 6%. They are less than that.
We couldn’t adjust our dividends to make any difference. We were not going to ever be anything other than minimum loan territory as DH was earning lots and that wasn’t going to change.
So those of us totalloy funding students should perhaps be getting a bunch of flowers or at least thanks from the state as we pay a lot of tax plus ensure our children aren't a drain on the state. I think a "Corbyn Socialist Prize for Contribution to the Big State " should come my way.
Well if Labour had got in you would have had the biggest state handout in history!
Many fees subsidise the courses which are more expensive to run so if yours are not doing science, you can take a bouquet for funding all those expensive to run degrees where the students end up with better paying jobs (on average) anyway.
Corbyn had just promised to stop loans for new graduates. I remember we looked it up at the time - he did not promise to write off existing loans but who knows what unelectable Labour would do if they win in 2022. However I agree it is another issue to consider - if you pay it off or ensure they don't have loans and then a Government later writes off all loans (unlikely) people might be kicking themselves. ( I have one doing a BSc and one a BA so a mixture and indeed a mixture between all 5 children)....
Charging interest at 6% on loans while students are still studying is morally wrong.
The fact hat the Universities get the full £9250 per student even for courses with dire employment prospects is morally wrong.
Making low paid but essential jobs become graduate loan only (nurses in particular) is morally wrong.
Corbyn's rash loan idea did not sway any student voters that DD or her friends were aware of.
What swayed them was Brexit.
Sadly they were ill informed about how much Corbyn wants Brexit.
Actually a recent piece of research found that nurses, after 5 years, were by no means at the bottom of the graduate salary pile. There were loads of degree holders below them such as artists and drama students. Doctors were on top. LSE economics grads were specifically near the top! Wolverhampton economics grads were near the bottom and way below nurses! Also, when people are fairly lowly paid, they never pay off the loan. They are, relative winners. Martin Lewis did a good piece on this on Radio 5 last week. A good guaranteed pension scheme with employer contributions, no hefty loan pay back and a job for life is worth having. Teaching and health jobs are certainly worth the loan.