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

[SadAboutTheBoy]

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?

It also depends on how much extra money is available to him from you or other sources. For example if you can fund a postgraduate degree (£20,000+ fees per year) that may be required for high earning careers as well as deposit for a house or business start-up then liquidity is less of an issue.
For most of the younger generation, available capital could be key to facilitating things post graduation.

It's not a loan, it's a graduate tax.

Repayments are made by PAYE.

That is all.

KeneftYakimoski
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.
I agree with every word.
We have also made the same decisions as you. Take the loan, for now at least. Review once degree completed and career path looks clearer. At that point we will either pay off the loan or pay house deposit.
Already one of my DC has changed direction. After winning a place at Oxbridge and graduating with a first in Maths she went into teaching.So low pay and unlikely ever to repay student loan.

DC2 seems likely to do post graduate study which we will fund asPG loans are a) only £10k and b) re-payable concurrently with UG loans.

The 6% income on any remaining inheritance will be taken into account when calculating loan repayments so you may find even on a lowish salary that he is paying quite high repayments, it totally depends on how much money we're talking about.

We are in a similar (very fortunate) position and my DS is using some of his inheritance to pay fees and rent (we are covering living costs plus he's using savings from a PT job). He doesn't want the debt hanging over him or the hassle with having to inform SLC if he goes abroad for long periods of time so that's what he's decided to do.

I think it's a good use of the money in his position, but I recognise it's an unusual position to be in that most people won't identify with so hard for others to advise.

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

^THIS x1000

If he pays for uni up front, he could end up never being able to save enough for a deposit. Even if he gets a well paid job straight after graduation, he’ll likely see most of his salary going in rent, especially if he’s London based. Taking the loans and using the money as a deposit is a much better option. Also, he could change his mind about his future career, it’s definitely not a given that he’ll be a high earner.

If he becomes unwell or disabled, decides to be a SAHP or work part time, takes an altruistic lower paid role or wants to start his own business or retire early the money will be much more useful to him than not having a loan. If things do go as planned and he gets the highly paid job and it becomes clear that he is going to pay off the full balance he can always pay his loan off early but I wouldn't recommend not taking one.

I'd get the loans to enable him to buy a house earlier. No brainer to me.

Forgot to say we will be in the same boat with our kids although it's 10 years away but I would definitely be advising them to take loans under the current system. Their grandfather who gifted the money would agree.

I would love to know how he is managing to get 6% on his savings. Most people are lucky to get around 1%.

It is quite a difficult decision, I agree. However people who say take out the loan as it is only a graduate tax and most people will never pay it back are forgetting that they will still be paying 9% over 25k for 30years. That will amount to a huge amount of money paid back, even for lower earners.

Certainly my DD has gone into a high paid graduate job, so our decision to pay her fees was correct. She would otherwise be sitting on a loan accruing 6.6% interest, which is massive.

Mortgage lenders will also take the monthly repayments into account on their affordability test, so this is an additional issue.

Thanks for all the replies!

ExcitementBubble - I agree it's an unusual position to be in that most people won't identify with so hard for others to advise.

To answer a few questions & suggestions:
Part of his inheritance is already invested in a buy-to-let property (not a student one) in which he has 1/3 share with some other family beneficiaries. He gets income of about £5000 per year from that, and the value in that property would provide a good deposit for any future property purchase of his own, so although I agree that normally it would make sense to take the loans and keep the cash for a deposit, I think he is fortunate to probably have this covered.

jeanne16 - the 6% comes from a mixture of property (capital growth and rental income) plus investment funds plus a bit in fixed rate savings bonds which are now maturing. It has now been managed by the trustees up until now, but obviously he has to begin to take control of it (with our help) in the future.

I can see the logic of taking the loans in the face of future uncertainty, and maybe that is what he will do.

However on the downside, I am hearing horror stories from friends with older children saying that dealing with the Student Loan Company can be a bit of a nightmare and that lots of mistakes are made with the PAYE calculations and if you work abroad. Part of me thinks it might be best to avoid that!

DH, DS and I are going to sit down this weekend and crunch all the numbers, pros and cons

However on the downside, I am hearing horror stories from friends with older children saying that dealing with the Student Loan Company can be a bit of a nightmare and that lots of mistakes are made with the PAYE calculations and if you work abroad. Part of me thinks it might be best to avoid that!

Please don't make a significant financial decision which will affect 30 years of his adult life just on his ability to deal with a bit of crap admin.

If he owns 1/3 of a house, the other beneficiaries will have to buy him out to release that money or they will all have to agree to sell to realise that money. Therefore it may not be as easy as you think to get the capital out. There is also capital gains tax to consider too.

If he is thinking of London, DD is just buying a flat there at a stonking amount of money. She earns well. We have still had to sub by at least £250,000. I would do your sums very carefully before using up his money on fees.

I agree with Cunt - read the student loans section on MSE - it made us decide taking maximum student loan was the best option for my DC.

It would be a shame to lose his 5k income to release money for his own home. Better to keep the buy to let and buy another? Surely it would make more sense to take the money to give him options at the end of his course. He can always pay it back then if he doesn't need it.

He could pay it back after his degree but interest starts accruing on the loan from the day it is taken out. So while he is still a student, the loan is increasing by 6.6%. So he will owe a lot more than he has borrowed by the time he graduates. To me, this is the most disgraceful part of the whole student loans system.

If you think he is ambitious and will earn a good income over his working life ( which is surely what most of us want for our DCs), then you should avoid taking a loan, IMO.

Bubbles - the other beneficiaries are all close family members, and DH and I have already said we would buy out his share if he wants to get his money out. Yes, capital gains will be a consideration, but so far his share has only grown by £22k and he would have his £11,700 (or whatever it is in the future) off that, but yes, it is to be considered.
The house is in the London commuter belt, so we may keep it in the family one way or another.

Dora - we've read the MSE stuff in great detail, and in fact it was exactly that which made me think that DS may be one of the minority of cases where taking the loan didn't make sense, that's why I posted here to see what others thought.

It's the compounding nature of the interest which is the biggest issue. One of the calculators showed how if a graduate started earning just marginally above the repayment threshold then the 9% would equate to a repayment of about £15/month, HOWEVER the interest added to the loan amount that month would be about £180 depending on the RPI.

That's fine if you really believe that you'll never pay it off in 30 years, but terrible if you think you might become a high earner in your twenties or thirties. Top rate tax of 40% kicks in at £46,351 currently, and an additional 9% student loan 'tax' could be crippling right at the point in your life when you might be trying to buy a house/start a family / paying for childcare/ going down to one income earner etc.
The worst case scenario is the graduate who is a lowish earner in their twenties, letting the compound loan interest accrue, then 'peaks' as a high earner in their thirties and ends up paying off c. £150k, clearing it just before the 30 year cut off!

It's a tricky decision, isn't it, because it requires you to have a crystal ball...

I do think you have to keep an eye on property prices if he wishes to live in London. Obviously that’s crystal ball gazing too, but it’s where the bigger salaries are. With our £1/4m, we could have paid DDs undergrad fees etc. We did pay post grad course fees and pay for her keep for two years after university but she took out the loan (at the lower level) for undergrad. If you have enough money for a deposit for a property in London, and he will earn enough for a mortgage to buy there, you probably should do it now. We are giving to reduce our estate for inheritance tax purposes. It’s big money though and we don’t really think the money we are giving would be better spent paying off the loan. We need it for the property. London prices are exhibitant and she must live there. If your DS is less bothered about where he lives and he earns well, all will be ok, but a £50,000 salary gets you not very far in London so you need to do the sums re a deposit.

Bubbles. You are correct in most of what you say, but just a few comments.

Firstly, if you are keen on reducing inheritance tax, then paying fees is a good way. If you decide in a few years time to pay off your DCs loan in a lump sum, then it will be liable for inheritance tax.

Secondly, I suggest everyone looks at the student loans calculator online. If you start on a salary of 55k, which is a typical graduate starting salary in London, then you repay the approx 60k maximum loan in 26 years but you end up paying 153 k back. This assumes a 2% salary increase. In reality they should get larger increases in the first few years, all going well. I think this is a huge amount of interest on top of the loan.

Thirdly, mortgage companies now look at affordability when giving out loans. The 55k pa graduate will be paying off £195 per month on the student loan. This is quite a lot on top of other expenses and will reduce the mortgage they can have.

Because he will not get a lump sum like this again in a hurry. He could use it for a house deposit when he graduates.

Dd will also have money from an inheritance but she won’t be using it for uni fees/living expenses.

He could take a loan for the uni fees, can't take a loan for a deposit.

They've now changed it and moved the threshold to 25,000, so you're only taxed on earnings above that. These days, it will prob take him a few years to get a salary to start paying back, and it will only be a hundred or so a month. And after 30 years, gets written off anyway. It really is more like a grad tax.

Tbh I think it would be crazy to spend that cash on uni when could take out this loan instead.

Also, in many fields having a postgrad degree has become quite important. I could never afford one (even with the new loan, I'd need living expenses) and I'm still facing obstacles because of that.

"55k, which is a typical graduate starting salary in London"

HAHAHAHAHAHAHAHAHAH

One point which hasn’t been mentioned which is worth considering about the maintenance loan is that it is not uncommon for better off students to use the money available from the other source to live on and then make poor financial decisions that make them decide to take a maintenance loan out as well, which is obviously not what you had in mind. They may sound sensible now when at home with you, but a bit of freedom frequently goes to their heads once they leave and start enjoying student life (I work in HE).

I did a degree that was supposed to lead to a high paying job, I did everything right but now I’m 34, never earned more that £23k/per year and I’m working part time now for £15k because of family commitments. Call centres are full of people with good degrees, just on my team we’ve got a law degree, business degree, PGCE in English and a sports science degree The only people I know from uni who are making good money are people who got in the right company at the right time to get promoted through the ranks or have started their own businesses and taken the risks that are involved with that.

I’m glad I didn’t pay my fees up front. Granted they were a lot less than under the current system but I’d be inclined to hold onto any cash for now as you never know how it will come in handy in future and what opportunities will come up that he may otherwise miss out on, are unpaid internships still a thing?

He can always make overpayments to the loan if it looks like he is going to be in the lucky position of earning enough to pay it back in future.
Don’t worry about him paying the extra 9% if he becomes a higher rate tax payer, I seriously doubt it would be crippling and he’ll have his lump sum available to pay it off at that point.

I know some people are firmly against debt of any kind and will tell you never to borrow money if you don’t have to, in my experience they’re people who’ve never had much money and don’t have much financial acumen, people who have money are usually happy to borrow money and pay interest to ensure they’ve got cash available if they need it.

Honestly, no matter how high flying your son is, i wouldn't go by the assumption that he'll be earning 50,000 within 10 years of graduating. Even a friend who did an employable subject like economics at a top rated london uni, then did a masters, then spent a year work in a pub while applying to everything, and then couple years working abroad before coming back to a 35,000 job in London. That was the general trajectory that most followed.

And so many high paid jobs require masters and internships. Only 6% of undergraduates have actually found a job before they graduate. Don't expect him to walk out of undergrad into a job - its not the 70s. He will need extra capital after graduation unless he is extremely lucky.

It will be harder to get on the housing ladder than to pay off the loan, even on a top salary.