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.

Yes, there is no
right or wrong answer on this. My own reasons included that my parents made our very very tiny minimum grant in the 80s up to the maximum grant ie they paid university costs. My first child's university fees were £1k (plus very high rent); child 3 was 3k fees so when I came to the twins it would have been a bit mean to say okay fees are now over £9k each so I am not paying them so I just carried on paying theirs too so all the children were treated the same as it was not their fault the state put the fees up from £1k to £9250 from child 1 by the time of children 4/5.

Secondly I am not a great fan of debt and to start those young people who go to university owing money is awful psychologically even though it is not really a classic debt so that is another reason I did it.

Thirdly since the first child are born we have had massive childcare costs - full time for a baby then and now is really expensive. That morphed into school fees age 5 - all about the same to the twins school fees of about £17k each and then university fees/rents being just about the same so basically just continued the "pain" over the years until this year (the twins are now in first solicitor jobs). I also work for myself and there is no reason I would want to stop work anyway so it seemed the best place for the money - university fees, paying off my mortgage etc. It is not as if I want to spend loads of money on an expensive car.

However I understand other view points and they can be right too for a particular person eg that age 18 someone is adult and bears their own choices and costs.

My DC were not adversely affected. Never worried about it for a second. Mainly because most of their friends did the same. Even the rich ones! Lessons in life about money really.

"Lessons in life about money really", can i ask what you mean by this? Do you mean that because everyone does it then it is right and that the young adults will learn how to manage money?

We decided to pay fees, rent, and living costs.
Our children haven’t taken out loans.
Obviously, our children are lucky that we can absorb these costs, and they know that they’re lucky/privileged

I’m very worried about all those clever students whose parents cannot afford to support their children.
My husband, if applying now, would be an underfunded student.
He went on to be a senior equity lawyer in a top city law firm.

@Lakelandmumofthree I mean several things. Sometimes you have to take personal responsibility for what you want. Many parents simply don’t have the money to pay so their dc have no choice. Take the loan and go to uni, or be risk averse and don’t go. Therefore there’s a mature evaluation and decision to be made. Is this degree worth it? Am I ok paying the grad tax and will it be better for me if I don’t do a degree? Or am I going to earn well post degree and I really need the degree and accept the cost? Judging by applications, the cost is overwhelmingly accepted.

If dc decide to take the loan (and the majority don’t have any option) they might then be fully aware that their mates are in exactly the same position. If you look at deprived areas of the uk, it’s unlikely inheritance and parental income are paying fees and maintenance up front. The cost of living is causing lots of issues and parents don’t all have huge incomes or savings. I think if Dc believe a loan is standard for most, there’s no worry. Once the decision to go has been made, that’s the end of it.

Having money that you are responsible for does mean dc stand or fall by their decisions.Parents do top up of course, but DC should be encouraged to understand that HE has a cost. Some dc really go all out for a high paying job, others take a slow route and some don’t bother much at all and certainly after art degrees, it’s difficult to get a well paid job. Thats part of the decision-making process though. Doing what you love has a cost. To you, parents or both.

I’ve never spoken to anyone who has worried about the loan. It’s a fact of life they all live with. Others do seem to work and save up for the masters though. Again it’s vital to evaluate what qualifications are worth.

Yes I see what you mean..I think it's such a personal decision, I think my son would avoid uni if we weren't paying as he'd worry too much about the loan but it's the right route for him which is why we're encouraging him. I think it all comes down to my own upbringing where it was drummed in to me to be frugal and not to get loans etc ..it's hard to shake off!!

I agree, we're fully supporting and he's so grateful, it isn't taken for granted.

It’s easy to take the moral high ground if you have money. It all sounds a bit smug. Other dc are grateful for small things and these dc are equally nice dc.

@Lakelandmumofthree Why does your dc worry? I think it’s now less clear cut about taking the loan but why is he worrying? He probably knows you can pay so is it just easier to say he’s worried? What would he do if you had no money? I bet he’d go to uni and take the loan. As most do. It’s worth remembering that loans and foreign students have increased places at uni. If it was 60 years ago he might never get to uni. If his intended career requires a degree he should go but he also knows you will pay. Our DDs knew we wouldn’t. Other than our responsibilities for maintenance.

You think it sounds smug..Know the word jealous? You insinuate I'm being played, you know nothing about our relationship and the hurdles he's overcome to even contemplate going!

Not at all jealous. My DDs boarded. We paid boarding fees for 7 years each. I therefore have plenty of money but I know that my DDs needed to become adults and look at their responsibilities. With the loans now, we might well have paid but the art type degree was still an issue as income isn’t great.

Your DC has got parents who can pay so the dynamic is entirely different. I’ve been there. What would he do if you couldn’t pay? Also don’t assume other dc don’t have problems to overcome whose parents cannot smooth the way with money. Whey do they do? I’m afraid dc totally pick up parental views. They are your dc and know what you will do. Mine never asked for more money though and we agreed that they would get money for other things from us. They have.

And have your DC paid their loans back in full now Tizer?

@StarlingsForever Yes: one has aged 30. The other one no. She did a degree in an arts field so we didn’t think she would pay back much. Depends on what you think about the arts but we’ve paid Shed-loads of tax down the years so don’t worry about this at all. DD does a worthwhile job but isn’t paid that well. She was never going to be ultra clever or get the best job ever. So she has a loan. Many people working in arts related jobs don’t get paid much but I think we still value them. DD used the system as if was set up. We paid for a secondary course for her which helped with her career change from uni subject.

Thanks Tizer. Just asking as I think I saw that one of your DC had a well paid job. Ours are on track for good careers and we opted to let them take the loans although we could have afforded to pay up front. We are taking the view that they treat that as a tax and we will make a big contribution to their first properties instead. Every so often I wobble though when I think about the interest and wonder if we made the right decision. Then I tell myself that if anything happened (hopefully not) and they didn't end up on their chosen path and earned less, it would definitely have been the right decision.

PS I do very much value the arts. The world would be a very boring place if everyone studied STEM!

@StarlingsForever Our thoughts exactly. DD1 is a barrister but clearly a career choice that had no guarantee of success or high earnings! So we hedged our bets. She paid off the loan and we gave her a flat deposit. It’s inevitable that many arts grads won’t pay off the loan or much proportion of it. Hopefully they won’t look at interest rates or we will never have any arts grads! MN does have a high level of very high achieving dc and high expectations. Some of us know dc won’t be like that and take a pragmatic view.

Student loan repayments are not all that much, and you are making an assumption that they will have a job paying £50k. They might not, for whatever reason.

You might be better off investing the £52k instead. Or lock it away for a few years and let it grow - if you invest it wisely it may well grow by more than the amount per month your DC will be paying back for the loan.

When it matures you could pay off the loan and have a big chunk left over which would probably more than cover what your DC has paid. And you'd also have a better idea of whether they are on a trajectory of a well paid career or not.

People do go to uni and then completely change their minds about what they want to do. It happens all the time.

You really do have to keep in mind that they might not work or earn so much for whatever reason - if that happens, then paying it off is a complete waste.

I seem to be in a different place to other posters. We were content to pay for the DC as we did not want them to leave University with debt and we saw it as our duty as parents. It was a bit of a stretch, but a stretch we were used to, as we had previously paid school fees. We were happy for them to choose their subjects. They equally were content to have less spending money than some of their peers, and be frugal in terms of coach rather than train, ensuring they got their money back at the end of a tenancy, batch cooking and pre packed lunches etc. Life was fine without taxis or Deliveroo (or drugs).

Equally we see Government spending as finite. There are loads of things the Government should be doing. And even more that they could be doing. Subsidising my children, when we can afford to invest in their future, is not one.

I can see why you would suggest that, but for parents who have the funds to pay upfront it may be best to do that rather than investing it and trying to pay it off later. From Sept 2023, I think the interest rate is now linked to RPI, which can be incredibly high (ie 13.5 per cent when we looked into it in Feb 2023); and, in contrast to previous student loan plans, the interest rate is no longer capped at 6-7 per cent (or whatever it was), and this info is no longer online. As interest payments aren’t being made during the degree, I calculated that the compound interest on a £56k loan, £14 k per year, would turn it into a loan of £70k by graduation (4 year degree), if the rate stayed extremely high at 13.5 per cent (which it hasn’t, but may go back up. So if parents are thinking of paying it off, better to do this as you go.

The interest rate on the 46K originally borrow is sky high so the debt 9 months after graduating is now 52K. It is now or never really to pay it off, as the increase in debt is so fast, at the last phone call to SFC about £300 per month.

If we kept the money in high interest savings, say 5.2%, the 40% tax we pay in the interest over £500 would mean the interest we get is relatively low. We could invest it in ETFs but again they could plummet and we lose 10% rather than gain it. So paying the 52k student debt which is growing by 7.8% every month seem the best thing to do for us.

DC has set up a standing order to pay £1500 a month into a growth ETF ISA each month and another £4k will go in their LISA from us each year. When they are ready to buy a house, hopefully they will have a good deposit saved.

When I graduated, my first salary was 12k a year, 30 years later is about 5x this.

If your DC's first salary is 35k; in 30 years time, will it be 5x this? Paying 9% of everything over 27.5k is going to be a huge chunk.

The tax burden of 20% Income tax of everything over 12k, 40% over 50k, 10% NI, 8% pension and 9% Student Loan of everything over 27.5k does not leave much, never mind factoring a mortgage and childcare costs. Young people under 30 are going to be hammered. Taking away the 9% burden, if you can, seems sensible.

Hesa gjves starting salaries average £27,500 for grads. More in London and more for stem and business. More for teachers too! So £35,000 is possible in London but London average is £6.000 pa more than Wales. £50,000 after a couple of years is possible but depends on job and location. DC don’t always earn what parents expect.

Overall I am not overly concerned about my son taken out student loans for tuition fees and minimum maintenance allowance. We will support him by topping up his maintenance loan probably by paying for his accomodation, but this will really depend on where he ends up. All being well, we also plan to provide the £4,000 allowance for his LISA while he is a student. I am comfortable with the Plan 5 terms, RPI as the interest rate is reasonable particularly over the long-term and I hope is able to pay off the entire debt or else I would not encourage him to go.

The only situation that does worry me is if he becomes a very high earner and has to pay large salary based amounts at the same time as starting a family and needing to pay childcare costs. He is however going to study history and has no interest in law, finance or consultancy so hitting say £100k before 30-35 seems very unlikely. One possibility I have thought of is continuing the £4k support post university and for it to be used either for LISA allowance or additional loan payments, whatever makes more sense for him at the time.

Ive been reading this thread with interest and rising panic as paying more than topping up minimum loan not really an option. I know a few have mentioned the LISA and I’ve been reading up on it. Am I right in thinking that if DC were to buy in London at any point (eg with a partner) they can’t access the loan if the price is >£450k. If it had increased in line with house prices this figure would now be £607 according to MSE. So there is a risk of paying into it and then having to pay a penalty to access it?

The limit is £450k and a concern, especially as this limit applies to the total price of shared ownership properties as well. It is not the worse problem to have though and very had to predict in advance. If it does look a likely scenario will adjust plans accordingly.