'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.

Tl;dr: if you can afford to pay the fees up front without it affecting other spending or gifting to your children, you might as well. But if like a lot of people the choice is help your children to buy property OR pay their university fees, then it’s hard to see how paying their university fees is the wise move.

It's not only rich students who pay their fees, it's a very unfair portrayal. My dd worked and saved up two years of fees (her grandparents are helping her with the third year) because the money was causing her anxiety so she delayed going. (She lives at home to save money)

"Tl;dr: if you can afford to pay the fees up front without it affecting other spending or gifting to your children, you might as well"

That really is NOT the TL;DR here.

The basic point about the loan is that if you are not going to pay it back, e.g. if you are planning to get married and become a SAHM, or if you are going to live in Vietnam (technically it is globally repayable, practically not so much), or if you are going into a low paid job, or whatever, then the loan is just free money and you absolutely should not pay it up front.

Just a quick question. What is the APR on the 6.3%?
Is the 6.3% interest calculated monthly, in which case it will be nearer 6.5%?

The basic point about the loan is that if you are not going to pay it back, e.g. if you are planning to get married and become a SAHM, or if you are going to live in Vietnam (technically it is globally repayable, practically not so much), or if you are going into a low paid job, or whatever, then the loan is just free money and you absolutely should not pay it up front.

At the point you would be paying the fees, all of those are imponderables. Perhaps a better strategy would be for people who can afford to do so to pay the loan off on graduation or a few years afterwards, based on plans at that point. I think to go to university on the assumption that, aged 18, your plan is to be a stay at home mother is a little odd.

I think it is a good way for affluent grandparents to spread their money and reduce the risk of the family losing 40% in inheritance tax

"At the point you would be paying the fees, all of those are imponderables. "

Eh? If you are studying to become a primate scientist in the Congo, or whatever, then you are unlikely to pay back your loan - it's far from imponderable.

Some people do plan to become SAHMs, not everyone to be sure, but it's a real thing.

To be quite clear, people are being quite dramatic about the loan, but let's say you borrow £18k a year, then over a 3 year course the total real cost is ~£3,200 (ignore the 6.3%, it's 3% + RPI, so in real terms it's 3%) but only if you are going to pay it back.

If you are not going to pay back the loan, then the £3,200 is just a meaningless number.

So yes, it's broadly speaking very stupid to pay the fees up front given that if you have £60k sitting around then it's likely earning 4% or so in some kind of investment, so the real cost could be less than £3k. And then if after graduation your child decides to do something low-earning, then why would you pay it back? It's money down the toilet. Better buy them a house or something.

Basically the cost of borrowing is ~5% of what you borrowed in total, over a 3 years course BUT once you graduate it doesn't grow at all unless you are over £25k. So why not, as a sponsoring parent, defer payment until that point?

I think it is a good way for affluent grandparents to spread their money and reduce the risk of the family losing 40% in inheritance tax

It depends - the advantage is that it is upfront, BUT as a grandparent a £9k student fee payment would attract IHT if they died within 7 years. It doesn't change the tax position when compared with other forms of financial help to a child. The issue, again, is that whereas IHT may be seen as a gift to the government, so too is repaying a loan that doesn't need to be repaid.

Absent the somewhat imminent mortality of grandparents, the best time to repay a student loan out of savings would be after graduation when the graduate was already earning £45k+/year, because that would be the point at which the 6%+ interest actually starts to bite, and it was clear that the loan was likely to be repayable.

(As above, with a £60k debt & inflation of £2k/year, the 9% repayment rate means you are only even paying the inflation when you earn above £47,222, so still not actually repaying the loan, but at the point that you had such earnings you could at least have a much better-informed perspective on whether you were likely to be on £60k in 2 years or whatever, so better to pay off the debt now than allow it to grow in real terms)

the interest rate is meaningless, student loans are an extra tax nowadays rather than a loan
My(english dd) qualified for a welsh NHS bursary and not have to pay fees , it was not worth it as she would have got a much lower maintenance loan ,so coming out of uni with about £8000 debt over all. Also if she changed her mind about working in Wales she would have to take out a normal loan to pay fees back

Short term worse off with nothing to live on

medium term ,You now start paying back on 9% of earnings over £25k so on £30k about £30 a month, that is the same whether your debt is £8k or £40k
long term if she became a consultant she may earn up to £58k but i suspect that is unlikely and realistically her earnings will be up to about £37k, so she will not be paying a huge percentage of wages anyway.

Out of interest how much would you be paying per month on say £55k?

£225 a month

£225 a month

A repayment mortgage on the additional £60k you would otherwise have available to use as a deposit would be £284 a month, assuming you could get a 3% mortgage over a long period of time.

So if you are earning 55k, you can choose between £225 of loan repayments, or £284 extra on your mortgage.

Jesus that is a lot. How much would it be for £60? What would happen if you had a bonus bringing you over?

Problem is many not so rich work up to that salary. Then just when you need it with teens to provide for themselves they'll get clobbered alongside not getting CB.

Not much of an inventive to work hard or aim high.

My DH has a student loan. He pays £300 a month now. He's 31 and still owes a lot.

He's only in the last year or so started earning more, so hopefully it will get paid off quicker now.

The comments about the difference between paying off a 60k student loan vs a 60k mortgage are valid. The calculation is really complicated. Obviously hopefully the DCs salary will increase over time so the £225 pm assuming a 57k salary is the starting amount and will increase. The mortgage payment will also change over time, both up and down. So it is hard to compare accurately.

For us it made sense to pay upfront for a number of reasons. She has started in a very good graduate job and has had salary rises and bonuses so her repayments would have been large and so would the amount of interest. My DD was also not ready to buy a property straight after uni and as it now transpires, I think house prices are dropping so it was the right decision (although we couldn’t have foreseen this so wasn’t part of our calculations).

However I agree it is not straight forward.

@titchy Jeanne doesn’t specify how much her DD is earning but let’s assume it’s 30k her repayments would be less than £100. For me the issue was we were told that interest would not start acruing until they graduated and that the interest rate would be no more than x above base and then 2009/10 happened and it changed everything. Students who had already got the loan were saddled with higher interest rates as the promised rate would have been essentially reducing their loan and interest was added on while studying.
I don’t think the rate of repayment is an issue other than people are paying twice/three times what they borrowed which was the opposite of what they were sold.

@QuietContraryMary except the government stopped you being able to pay off you loan in a lump sum as they saw that wealthy students were taking the loan making money (interest) and paying it off as soon as they graduated.

I had an interesting chat to an Aussie friend about their loan system HECS. It seems that the British system is quite closely modelled on it, and two features that were added to theirs were:

a) reduction of earnings threshold (to the point that it is functionally abolished everyone in work repays)
b) outstanding balance is taken from estate if the graduate dies before it is paid off

@Faithless12, the SLC gives you many options for repayment, the website explains how to make a lump sum repayment. With regards to your claim, it seems that the purpose of the higher rate during study is to discourage people to borrow 'free money'

@titchy Jeanne doesn’t specify how much her DD is earning but let’s assume it’s 30k her repayments would be less than £100
If its £30k it is £30 a month

student loan calculations

Sorry i meant £37 a month for £30k salary

except the government stopped you being able to pay off you loan in a lump sum

No they didn't. What they did was charge interest during study to discourage the trick you describe.

In most situations there is a cost of liquidity. A lot of people in their forties could pay off their mortgage more quickly if they lived month to month and accumulated no cash savings. A lot of people choose to borrow the money for a car on a PCP rather than buy one for cash for similar reasons. In each case, liquidity (having readily available cash available) justifies paying to borrow other money (by having a mortgage for longer or by using a PCP).

Most of the simplistic "it's debt, innit" or comparing cash outlay over time ignore this. They ignore that (a) liquidity has a value which is worth paying for and (b) that there is an opportunity cost to most things. For example, you can buy a house for cash if you live in a shoebox while saving for twenty years, and then pay cash, and if you compare the price of the shoebox with the interest on a 25 year mortgage, it might cost in. But few people do that.

The mistakes made in the discourse about student loans include (a) ascribing zero value to liquidity (b) ignoring opportunity costs (c) ascribing unrealistic downsides to debt and (d) assuming that cash outlay over 20-60 is fungible. In reality, none of this is true.

I have done financial modelling for a living at one point. I have capital such that I could pay my children's university fees, and I am willing to spend that money on my children. They have taken the loans. Other people may rationally do otherwise, but they (like I) should realise that the decisions other people make may be perfectly rational while being different to yours.

In other news, not all people have the same risk appetite.

I think the basic problem is not risk appetite, but rather that people are talking about a 'graduate tax' and such like without understanding that it is nothing of the kind.

It is a loan and the 'tax' is a payment of money that you have spent. And essentially the more you borrow the better, because it increases the chance you will never repay the principal, and it will be written off.

It is not a normal loan, the amount you pay back on a monthly basis is based on your earnings not the amount you owe, it is basically a tax on higher wages.
As i said above dd could have come out of uni with 8k debt. But she would not have had money do live on and we would have basically paid half her rent and all her living fees. Getting a job not easy as she has a 1000 placement.
At 30k wages she would be paying back exactly the same as someone with full uni fees and full maintenance loan

"It is not a normal loan, the amount you pay back on a monthly basis is based on your earnings not the amount you owe, it is basically a tax on higher wages."

It's not a tax because (a) you can repay the amount you borrowed at any time without any penalty beyond the fairly negligible interest during study, (b) if you don't take the loan then you don't pay anything, (c) it's not particularly an issue higher wages per se as if you are on a truly higher wage (£80k+. say) then you're probably best off repaying it ASAP, so in that sense you are repaying the debt.

The point where it might behave like a 'tax' is where your income is sufficiently high to repay MORE than the real value of the loan based on a 9% threshold over £25k and the total that you borrowed. The more you borrow the bigger your salary needs to be to equal RPI interest.

And the 'tax' would particularly bite in that sense if you spent, say, 10 years on £45k income racking up RPI+3% interest, and at which repayment level you would not begin to pay back the principal on a £60k loan value, but thereafter you earned much more so that the loan is increasing fairly rapidly in the early years and then you end up repaying it in the later years.