Should I pay off the student loan early?

[olympicfan]

DC has just graduated and the student loan already has 6k worth of interest added. (Borrowed 46k, now owes 52k). The current interest rate is 7.8%! They have got a job that starts on 35k but will be earning 50k in 2 years time. The job comes with accommodation so they will not be thinking about buying a house for about 5 years.

I had an inheritance and have also saved for DC so can afford to pay off their student loan before any more interest is added. Is this a good idea or madness? They are likely to be a high earner, but not city-lawyer type money.

My thoughts exactly, if rather go without things and watch then flourish, that's pleasure in itself.

@Lakelandmumofthree It is not a given that dc earn well. Most parents seem to think all degrees give premium earnings. They do not. I’m not saying that dc earn £25,000 after 5 years but what grads earn very much depends on degree studied and where you live. Degree studied isn’t a given for riches either. Look at research by IFS and you find university matters too. Some grads would have been better off never going near a uni. For high flying grads, going to elite unis, of course they earn well.

I have one of each. One earns 9 times what the other does. 3 years difference in age and older one is 31. Younger one has changed career and has never earned above £25,000 until recently. So what you think they will do doesn’t always work out. Especially with arts grads. Stem is clearly different but we cannot pretend a degree gets you great earnings. My friend’s DC is a politics grad. Started work on £25,000 in London in a grad job. The only job he got after 9 months of trying. RG uni and in top 10 for subject. However his work experience at uni was negligible but has a masters from a EU uni. So what did that achieve? Not much at the moment. Bank of mum and dad will be required for any property purchase.

DD1 and her friends are earning well enough but she outstrips most except the city solicitors! She’s not gifted but is good at what she does. She was clear about what she wanted and got her ducks lined up - which was vital. It’s not her degree that ultimately mattered though. It was a door opener. She had to get through it.

This completely backs up my argument. If they end up stuck in the £25k to £35k bracket they'll be paying 9% when they can't afford it. If he was guaranteed a job of 100k I wouldn't be worrying about him being stuck with it for the next 40 years.

Ask your accountant. It will be obvious; what would they do?

Paying now will save on interest but how much interest does your lump sum make and how much would a property increase in value should you put a deposit on a home?

It’s a small amount though. You could pay it! It’s very little when you compare with giving the full amount. Low earnings mean cheap degree. We have large sums for DDs for property. We did believe they should have loans. Clearly if you are very rich you think differently. We could have paid but DD1 paid hers back. DD2 won’t. They are adults and both agreed to taking a loan. We’ve got money for their property and we agreed on doing this. Many decisions depend on what money you have as a family but people who spend every 1p on dc fees etc might not be making the best decision. Talk to dc and set out the options if it’s a marginal decision. Many parents on these threads are rich. They aren’t the average family in the uk and their dc are not average either!

What we have found is that the fact it is a tax rather than a loan meant it was easy to ignore in the early years and for 15 years we pretty much ignored it.

However, then as we got older our income became more complicated and all of a sudden we needed to account for paying off student loans on things like second job income, capital gains on buying and selling shares, any item had we sold second hand on eBay (because we exceeded our sole trader allowance), it was becoming a right PITA.

Because our initial loan was smaller (the cohort who paid in feed but small ones) we could choose to pay it off and just not deal with it anymore. If we had one of the loans that grew to £100k we couldn’t do that. The problem is it is hard to predict what state your 18 year old will be in when they are 40 and if all these other wealth l considerations outside of a main job (buy-to-let income, investment income etc) that the 9% tax is applicable on will matter or not.

And I am not just talking super-high wealth here. The situation we found ourself in was akin to a teacher taking on extra tutoring weekends/evenings and then selling their child’s tuba when DC switched to another instrument.

@PurpleBrocadePeacock How does it all work? How does it get tracked? Through HMRC tax returns?

People not worry about the high interest rate as it is paid back only based on your salary. So even if you h ad £20m of student loan and interest you still just pay the 9% over the threshold which may just be paying back £500 a month for the period of the loan or nothing paid back if you never earn much at all.

If you might be on £100k a year as a lawyer (4 of my children are lawyers in London) and if the threshold were £25k then it would be 9% of £75k paid back per year. = £6750 a year (£562 a month). That is when it becomes quite a big burden if you also have £2k a month rent and then you have to add on full time childcare monthly costs too when babies come.

For me it was not one or the other - I paid the fees and helped them buy a first house. However even for me it (and also my very expensive divorce as a higher earner in the couple) meant I had no savings, pension and only paid my mortgage off last year in my 60s - a price worth paying to help others - the 5 children me and my ex all own a house - so 7 houses, one each, and also it means when I die which probably won't be for 20 years or more all these gifts have been made when the children need them and well before the 7 year inheritance tax thing kicks in so I am very happy to work until I die etc (this is the first year since I had my first child 40 years ago) that I have not been paying a child's university costs etc Two adult children live at home but buy their own food, pay for their own car etc.

@Daysnconfuddled

It is payed back in addition to tax owed when filling out the tax self-assessment with HMRC online.

So do people actually keep track of all the stuff they eBay over the Tax year? That's potentially a lot of admin on top of other Life Admin stuff. (I don't do eBay).

Some people make their living from selling from eBay. HMRC started taking more interest a few years back.

I used to employ a part time carer for my mother directly and was shocked at how much tax I had to deduct from someone who was on a relatively low wage. When people say that the loan does not matter because you might never pay it back, I think of the carer who is helping pay for this. The government pot is only so big. I am very happy to support students who will work hard and couldn't otherwise go to University. However I struggle with the idea that some of the poorest should be subsidising some of the richest. It's like a friend who studied medicine at Cambridge who said she was the only one of her peers who kept working after children. The rest had married rich men. Great if this happens, and you have the choice whether to work or not. Not great if you then expect the less well off to subsidise you.,

Huge numbers of women work part time to look after dc. That’s work!!! It’s valuable. Why are we belittling women who make this choice? What a nasty nation we have become.

@TizerorFizz I don't see anyone being belittling or nasty...edited to say speaking as someone who worked part time for 10 years after dc 's birth.

I read quite a lot of anti part tIme with in that others are subsidizing you. In effect most a bringing up dc. As they should.

Pressed too soon- if they want to. It’s not acceptable to say not working full time means others subsidise you. The women who cannot afford child care absolutely do need to work part time or give up! The idea that just rich women work part time as a luxury and others are spongers is unfair to very many women.

Absolutely not! Put it in a high interest bank account for five years so they can do what they want with it (most likely a house deposit) when the time comes.

Student loans are absolute bullshit and completely mis sold but they are also not a usual type of debt or the type that should be paid before other things.

Do you know how many people I hear saying ooh don't put your money in a pension invest in a 2nd house instead or savings account, blah blah blah. If I listened to them it would have been the shittest advice ever as I'm now on target to retire mid 50s. People will always have different opinions when it comes to money, the most important thing is to do what's right for you after researching as much information as you can. You don't know my financial situation and I don't know yours.

So, with much thought, we have decided to pay the loan off. With the money sitting in the bank, we are being taxed at 40% on the interest we receive. We have max-ed out ISAs, invested in stocks and shares LISA for DC x2 and have added to our pensions. We both enjoy our jobs, so are not looking to retire any time soon.

Hopefully, in 5 years time we will have made the student loan money back and will save DC 30 years of repayments.

@Lakelandmumofthree I meant a deposit for a house for the DC to live in, rather than a second home as an investment. I think it will be near impossible for the average young person to buy a house. I'd have preferred that to saving me a small repayment every month. It really is a significant figure OP is gifting and the benefit will only come to fruition if her DC is earning a massive wage.

I've no doubt you've received sound financial advice that is working for you.

Well the oracle of all things money related, Martin Lewis, is adamant that you should not pay it off unless you’re absolutely sure he’ll be a very high earner over a long period of time. It’s mathematically better to help with housing

I've read his recent article on it and he isn't absolutely adamant, he says it depends on your circumstances and if you potentially would need to borrow money to make ends meet because you were supporting your child's student loan then it's not worth it, which obviously makes sense. If you have a steady reliable high income then it is worth it as no one knows over the next 40 years what is going to happen, student loans could get wiped or interest could go bonkers, it is such a long time. Considering the situation with Russia for example who knows what could happen! I think his halfway house suggestion of putting it in a high interest savings account and paying it at graduation is worth considering.

Depends on the child though. Males are far more likely to pay it off. He fails to distinguish between the genders.

I considered this also (putting money into high interest account and paying it off on graduation), but when we looked into it (Feb 2023), the interest rate (RPI) was 13.5 per cent ( but it has gone down a bit now), and high interest accounts are nowhere near that. And what with compound interest / not making any loan repayments during the degree, I worked out that (assuming RPI stayed the same, at 13.5 per cent (which it prob wouldn’t)), four consecutive years of borrowing approx £14k student loan (so a base borrowing of £56k for an integrated MSc), would become a loan of around £70k at graduation, with the compound interest at such a high rate.

So while the interest rate is likely to be on average lower than 13.5 per cent, we felt it was worth paying it as we go. In reality, some of our costs have gone down since dc1 has gone to uni in Sept (food bills, energy bills, weekly music lessons, driving lessons, pocket money, mobile phone bill etc etc) which means that the additional ongoing cost to us works out much less than the headline cost of the tuition and catered accommodation, plus extras.

To avoid eating away too much of our savings, we are just shifting what we spend (and on what) slightly. So, we have an old car which looks scruffy, but it still works and is economical to run, so we will not replace it until it actually dies. I am cutting back on household spending (switching from Sainsburys and the local M&S) to mainly Lidl / Iceland (and just getting a couple of special bits in sainsburys). Our last holiday we took (in UK), was a choice between 2 cottages - we went for the one that was 2/3 the cost of the other, in a different area, but still really lovely. I try to keep in my head the target amount each term that I am trying to save. It is so much more palatable doing it this way, in small chunks, than considering the whole amount. And actually calculating what your savings are now that they are not living with you also really helps (eg for context I worked out we were around £500 better off without dc1 living with us. So this ‘saving’ is now put towards the uni accommodation costs.

I understand that we are very very fortunate to be able to do this, and that the majority of people would not be able to do this, and would have to rely on student loans. But it is something we wanted to do for our dc. As a family with 3 children, we couldn’t have afforded to send them all to private school (so it’s state schools for all 3) but they are staggered in age enough so that this approach is manageable for us.

My sentiments completely!! Glad I'm not the only one, I think as long as you follow your heart in life and your gut you can't go too wrong.