Is it a good idea to pay university tuition fees off upfront? Revisited.

[WandaOver]

Take the loan or pay up front, assuming you can?
This thread was a couple of years ago and I'm thinking things have changed since then. Brexit, inflation, interest rates.
We have two DC at uni and both have loans but we always intended to keep it under review.
One difficulty is the wish to treat both DC the same, whilst their career path and earnings may be different.

Take the loan. If earnings are lowish they may never pay it off. Parents who become stay at home parents or work part time will not pay it off. As for any high earner, they can afford it! Presumably you don't expect them to get £100,000 pa immediately after graduation? If you pay up front you are paying money that could go for a house deposit. If you don't need the money and are wealthy, pay now but most people take the loans and 50% are expected not to pay them off. It is very good value whatever happens.

Yes and great paying 6% interest from day one of term one ...

It is quite a complicated calculation. If you think your DC may never earn much, then take the loan as they may never pay it off. However the freezing of the 21k earnings threshold may well change that. It won't be too many years before that starts impacting the calculations.

We paid for my DD and she got a well paid graduate job so it was definitely the right decision.

The loan is NOT a particularly good deal btw as they are charged RPI plus 3% from the day they take out the loan. I think this is exhibitant. Mortgages are available at less than 1%.

the extortionate interest rate is designed to ensure that they will be paying 9% of salary for life. Whether it is financially beneficial to avoid that depends on whether you can also fund a house deposit or not and what the money would otherwise be earning for you.

One significant consideration is that payments are exempt from inheritance tax if made during the period of study but not if made after graduation.

Treating both equally could be giving both a sum of money and letting them decide whether to pay off loan or use elsewhere,

Interesting analysis already taken. I didn't know that about inheritance tax. Letting them make the decision is rather a lot to ask of an 18 year old but maybe at 21 That means taking the loan first and potentially paying 3/4 years of interest. I doubt many people get RPI+3% on savings.

V
One significant consideration is that payments are exempt from inheritance tax if made during the period of study but not if made after graduation

I didn't know that. So people should be getting the grandparents to pay. 🤔

We paid upfront even though we knew that it wasn't necessarily the best decision financially. I followed Martin Lewis's website for a lot of my information. He was saying not to pay upfront. We were concerned that the terms of the contract could be changed - which they have been.

The kids look like they should all be on for for well paid jobs but you never know what might happen.

Slinky, I think the answer is yes, but you need to check.

Surely it depends (and this is assuming you are in the lucky position to have a choice):

1. On what your own marginal utility is. For us paying school fees on public sector incomes was tough, but we can look forward to public sector pensions, are used to living frugally and with an elderly mother and a Brexit impacted work load, are not about to start taking lovely holidays in the Caribbean. So paying University fees using the money we no longer pay on school fees is the thing that gives us, personally, most value. Other friends are playing frantic catch up on pensions, or saving for fu money so they can retire early from an unhappy employment. And others are used to a certain standard of living and don't want to cut back.

1. Whether you want to incentivise DC not to earn much. One friend says she was the only one of her Cambridge contemporaries who has had a career, despite taking a fairly vocational degree. The rest married well. Marriage as a desirable career path for girls, still seems to exist in more affluent parts of west and north London. DD will make her own choices but I will encourage her to be independent.

1. Attitudes to credit. 6% is a lot. I am constantly amazed when people post about DC taking cars to University or wanting en suites. On threads about living costs people will say that their DC need their "little luxuries". One life lesson surely is that if you are borrowing at 6% you go without luxuries.

1. The "house deposit". This makes a lot of assumptions about future career paths, which may never happen. I don't know if student loan repayments are factored into mortgage company affordability calculations, but they need to be factored into to personal calculations. Not repaying loans will mean you can afford more in the future. Simple.

1. What might be a good deal for the individual may not be a great one for society. The public purse is not an unlimited pot, and money going to subsidise students from well off families might be better spent, say, on care for the elderly. The extent to which young people should consider the balance between individual benefit and societal cost could make for an interesting thread.

DC know they are very lucky to have their fees paid. They don't mind that they have less spending money that some others. Oddly that seems to mean they often have more in common with some overseas students whose families are stretching themselves, so expect to work hard and live frugally.

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Are you able to pay the lot off quickly after university if you manage to get a high-paying job? Or are there early redemption penalties, as with a mortgage?

I can see if you plan to be a plastic surgeon then paying the fees makes sense, but as ds is doing an Arts degree his future career is anyone's guess. If I had a crystal ball I'd think he'd be a middle earner: civil servant/teacher etc.

There are no early redemption penalties.

It is very good value whatever happens This isn't true for the high earners who just or very nearly pay off the loan over the 30 year term as they will pay way more than the loan value and will effectively end up subsidising those who pay off up front/very quickly and those who earn little and pay off very little. It is excellent value for those who pay back less than they borrowed as it then becomes an interest free loan or free money.

You do need a very good crystal ball to I know which camp your dc will fall in though. One advantage of waiting to near the end of a course before paying is you should have a better idea of their career plans or if they are going to fail their course entirely by then, so the extra interest at the start could easily be worth it.

You also need to factor in the element of life insurance/critical illness cover that you get with the loan (it is written off if you die, and if you are too ill to work then you won't earn enough to be required to pay it off).

Sadly it is statistically very much less likely to be worth paying up front for a dd than a ds as there is still a large earning premium for being male, even before you've factored in the higher chance of a career break and periods of part time employment that women are more likely to have.

No early redemption penalties but young people released from study may want to splash some cash on holidays and fast cars

You wont get RPI +3% on savings but you might get it on a rental property or the stock market if lucky.

Despite government comments when fees were increased lenders will take student debt into account when considering affordability, at least until it gets below 20k.

I dont think payments from grandparents are exempt from IT, only payments from parents. However there is the usual 3k exemption and exemption for regular gifts from income.

It's a complicated calculation - I drew up spreadsheets with various assumptions about PhD or not, likely salary, difference between saving rates and RPI and so on. These days you even have to consider if a son will take paternity leave and if it will be unpaid.

If you plan to be a plastic surgeon it doesnt necessarily make sense, unless you overpay in the early years and many young people are not going to be able to do that if renting in London. Young doctors can easily rack up 100k of debt over a 5 or 6 year course with inflated interest - and you dont pay that off on a junior doctors salary. Most doctors will be paying all their lives, although they will still have a "debt" written off after 30 years.

Can someone please explain the Inheritance Tax thing to me?

We are paying DS fees and accommodation as we go along (he's in first year). We are in the fortunate position of being able to do this (it's less than school fees!) and we want to allow him to graduate debt free. We also believe that if able to, we should not tap into Government funds unnecessarily.

I can't see that there is any inheritance tax exemption for paying university fees. It looks to me like it falls under the general rules for gifts i.e. If your estate is large enough to be liable for inheritance tax then any gifts will only be excempt if you live longer than 7 years.

I know I've explained that badly but maybe someone else who knows what they are talking about can explain it better.

I'd rather keep the money in my bank to help them get a house after graduating (as the loan counts as a 9% reduction in income)

I could (just about) afford to clear DDs for her but don't want to risk not being able to help DS

I cannot see why IHT would kick into it - the child has a loan because the parents were means tested
if they were poor it would be a grant
settling a loan they incurred because the parents have money should not be relevant
AND itf the parents had previously paid school fees they could claim the "ordinary spending" argument easily

I don't see what Inheritance Tax has to do with it ...

Inheritance tax would potentially be payable on a gift you make to your child, if you died within seven years of making the gift and if your estate were liable for inheritance tax. If you were contributing to your child's university fees/maintenance on a regular basis, out of your income, this would not incur inheritance tax. It may incur inheritance tax if you subsequently gifted your child money to pay off the loan as a lump sum and then died within seven years. Presumably you could plan for this by using the annual gift allowances - you could pay £3000 of the loan off in each tax year (as could the child's other parent, making a total payment of £6000 per year). You can also use the previous year's gift allowance if you haven't already, potentially doubling the gift the first time you do it. Alternatively (or as well), you could gift the child regularly, out of your income, and they could save it for making a lump sum payment of their student loan at a later date. You could also compare the inheritance tax saving with the interest payable on the loan. Disclaimer - I'm not an expert, but his is how I've understood it.

Moomin
I don't see what Inheritance Tax has to do with it

A poster at the beginning of the thread had suggested that payments are exempt from inheritance tax if made during the period of study but not if made after graduation so other posters, including me were just trying to find out if it that was true. It appears it isn't.

www.moneyadviceservice.org.uk/blog/inheritance-tax-seen-as-most-unfair-by-brits-can-you-cut-what-you-pay

Daisy62's understanding of the position is correct (I'm a tax accountant). As it currently stands regular maintenance payments out of income would fall outside the inheritance tax net.

Ok, thanks for the information. I think I've got it now. I guess the monthly allowance we give our Uni age DC would be exempt then.

still missing the point really - while they are in full time education sums used to pay for your childrens education and for maintenance are exempt. Once they leave education you only have the normal gift/ marriage exemptions.

Some head scratching going on here as well. Are there not three exemptions:

1. When payment is part of an on-going ordinary spending. For example if GPs have paid school fees and continue paying University fees.

1. Gifts are made out of income, not capital.

3.. If the doner lives more than seven years.

I'm still confused

while they are in full time education sums used to pay for your childrens education and for maintenance are exempt.
..... so regular monthly allowences from our income to our D.C. while they are at Uni in full time education are exempt from the 7 year rule ??? 🤔🤔🤔

Once they leave education you only have the normal gift/ marriage exemptions. Yep, I understand that part.

already
not true
if you have been generously supporting your kids and carry on doing so, its normal revenue rather than capital not IHT

hence why the Duke of Westminster gave his daughter a farm as a wedding present as he did not dip into capital to do so

needmore - yes those are the normal exemptions that apply anyway BUT there is an additional exemption while they are in education which is useful if you are spending capital rather than income.

Ta1kin agricultural property is exempt, he didnt need to demonstrate that was out of income without affecting his normal standard of living.

I imagine we all hope to live more than 7 years after our children graduate - so this is not the major consideration unless you are in poor health and/or will have a lot of money to pass on.