Is it worth taking student loan if you don't need to?

[NoSpend19]

I'm struggling with the maths on this.

DC is starting university next year and will be on plan 5 which is paid back for 40 years form the date of the first payment.

She is lucky in that grandparents left her some money in their will for university. As such she has enough to pay 3 years of tuition fees plus the minimum maintenance loan (which is all we would qualify for).

She is doing law and is hoping that her earnings will be reasonably good (but she's more likely to work in the regions than in a top city firm).

I think that she will be better off not taking the loan and just using the money she has since she then avoids the interest. I'm now however wondering if she is better off taking the loan money since she might not pay it all back and leaving her money in savings.

Has anyone done the maths? It's completely messing with my head. I have even tried to use an online calculator but its confused me even more.

I found the Money Saving Expert guide quite useful
https://www.moneysavingexpert.com/students/student-loans-england-plan-5/

I don't really have any advice and I agree, it's hard to know what's best. But I did see recently that the "money saving expert" website has a whole section on this which will be worth a read for you and your daughter:

www.moneysavingexpert.com/students/should-i-get-student-loan/

I have been thinking about all this.
My takeaway from the MSE links above is that a) interest is set at or even below inflation so it's not really bank-loan type interest at all b) the loan itself is unlike any other loan you'd ever get in that you only repay on earnings over £25000 (in 2023, it'll be higher from 2025) and not at all after 40 years.
So almost half of graduates never pay it all off (never mind any interest!)
So really, nothing to lose by going for it - you can overpay anytime later if you want to.

As Martin Lewis says, we should stop calling it a loan or 'student debt'. It's actually an extra tax which only higher earning graduates pay.
But don't take my word for it. Check out those links.

www.moneysavingexpert.com/students/student-loans-england-plan-5/#interest

How much could she take in not needed loan and what would she do with it? I can see it making sense if it goes into an investment that has a higher rate of interest than the loan. If she wants a property deposit, would it be enough? All quite fiddly though. If investigating would return less, or it is not enough for a decent chunk towards a deposit, then probably not worth it.

It is still a loan and accrue interest no matter what Martin Lewis says. If you go to university expecting you are going to earn less than 25k all your life may as well no bother

You would need to factor in the possibility of her either having a career break or working part time if she has children. She wouldn't be the first woman with a high flying career who decides to be a SAHM!

Using it for a house deposit once she's working might be a better investment.

Yeah but if you don't work you don't pay!

Self employed people can also pay themselves a salary below the threshold and won't be chased for repayments.

She going to be a lawyer so will earn over the threshold pretty quickly

did the grandparents leave it specifying uni? If so, use it for that as requested.

We used GP money to pay all DC tuition fees. They're male though, who are statistically more likely to earn more than females over the lifetime and more likely to have to pay it off. ML never makes that distinction. We give them the equivalent of the lowest maintenance loan each year to avoid ridiculous interest rates and they will pay that back to us interest free when they start working. DS1 has already begun to do this. They will therefore leave uni with much less debt.
Luckily we are also in a position to help with house deposits when the time comes.
Debt, of any kind, has never sat comfortably and the interest rates were enough to make us take the gamble.

If she has £27k available I think it would make more sense to invest it sensibly and save it for something like a house deposit in the future.

Honestly? Having been through the student finance system (and had my loans sold to a hedge fund a few years on - I’ve now finally paid them off).
If I had the means for that not to be a thing, I would absolutely would. It absolutely impacted my much needed take home at the point I needed to be able to save and at which my outgoings were necessarily higher because of where I had to live for work. Don't ever assume that the conditions that you start with will remain that way, no matter what they promise. And the interest is still interest. A few years out of the job market travelling or having kids or being made redundant and it keep racking up. Staying on to do a masters or a PhD? Same. It accrues interest from when it first lands in your account.
Check what the current interest rate actually translates to and whether it’s more than she’ll get in an ISA for those savings from the GP. On the plan I was on, it interest rate was more than 2% higher than the best current ISA rate. That really starts to rack up if she’s taking out £10k in fees loan and £5k or whatever living loan. And then suddenly has a pay bump somewhere in there.
There are Ts and Cs buried in there that allow them to do things like vary the repayment thresholds and whilst it’s not supposed to affect your ability to get a mortgage, it affects your take home pay so 🤷🏼‍♀️.

What makes a loan a loan? I'd say, being a sum you have to pay back no matter what or lose personal assets.
Plus, 'interest' which just reflects a change in value over time, eg a loan taken out last year repayable allowing for the sum's loss in value since, in other words, inflation - is not really interest.
It's deceptive. I think Martin Lewis is right.
I agree going to university assuming you'll never earn more than £25000 is misguided, but I doubt that's often the case, the best laid plans and so on. Almost all graduates will probably earn enough to pay at least some of it back at some stage.
But that's just it - career breaks for parenthood say, or illness will automatically let them off, until such time . . .
What actual real loan would do that?

I think Martin Lewis has his own agenda on this topic and I don’t really trust his perspective on it.

If he had a 40-year loan costing him thousands a year he may think differently.

OP the other major spend is going to be a house deposit. This is far harder to accrue of course. Will you be able to help with this?

Otherwise this may be a better long term investment than paying the fees.

Decisions vary by family circumstances so impossible to be generic. Our two DC similarly had kindly been left money by a grandparent.

Here is how we made our decision for DC1. I put together a spreadsheet of the loan and the interest that would accrue each year. Then balanced this against an income expectation over the 30 years (this was a pre 2023 start date for DC1) and hence the amount they'd be paying off. Interest accumulates from when you start uni so it racks up through the inevitable compounding. So by the time you start paying back say 6 years after starting uni your debt is significant.

While it is true many don't pay off their loan this is only because they have racked up 40 years of interest. In early years the 9% repayment over the £25K threshold isn't even paying off the interest. So you have interest on the interest. Then when DC start earning more the repayments balloon and you are still unlikely to pay it off but will pay back a large amount.

With the assumptions we chose it resulted in DC's loan increasing for 20 years due to addition of interest and then their salary would have increased sufficiently for the 9% repayment to reduce the loan and they would pay it off at year 30. Loan of £44K, repayments of £134K.

We decided to use the money from grandparent to pay for university for both DC including DC2 who would be under Plan 5.
(We are separately saving for a house deposit so ours was not an either or decision.)

Im in my 40s and still haven't paid back most of my student loan. I owe much less due to tuition fees being much lower in the 2000s, but I've ended up earning much less than expected over the last 20 years. I haven't even tho about the student loan. As a PP said it's not a loan in the traditional sense as paying it back is totally automatic and if you don't earn enough, you don't pay. If I wasnt very well off with limited funds, I wouldn't use grannies inheritance money to avoid student loans, I'd use it for a house deposit!
If you are rich then by all means avoid the loan interest.

If the money was left explicitly for education, then I would use it on that. Whether it is the financially right thing to do, you can't tell as you don't have a crystal ball. But at least you are doing what the GP's wanted.

Yeah if she has a lump sum like that getting on the housing ladder sooner rather than later would make a lot of sense

Martin Lewis uses the term ”risk” inaccurately, imho. You are not taking a risk if you pay fees and costs upfront and can easily afford to do so at the time, you are removing uncertainty - you then no longer need to spend your time wondering whether your child will be a low earner, high earner, long term ill, unemployed or otherwise not in employment for the next 40 years, because it’s no longer of the remotest relevance to have to think about those what-ifs, and it’s a total waste of time to look back on life in retrospect, 40 years later, once you know what the future did hold, to either congratulate yourself or to self-flagellate. You also no longer need to worry about governments changing the terms of the loan repayments if your child does not take the loans. Plus, you no longer need to think about how it might feel to your child to have up to an extra 9% “graduate tax” taken off their salary, on top of income tax, and how much enjoyment that might take away from a small pay rise. It’s not as if voters appear willing to increase the amount of official income tax they pay by 9%, however woeful the state of public services, so there is no point pretending losing that much of a proportion of your salary every month ever feels like a good deal at the time to most people. So yes, there are many reasons why getting the loan is a good idea, but wanting certainty is not one of them.

Of course, if all the what-ifs and not wanting to have paid more than you needed to for something are very much a concern of yours, then that’s probably because you can’t really afford to remove uncertainty by paying upfront - or maybe, because you think your child’s university degree is not worth the money charged, so are keen to avoid paying for it unless you have to… After all, if you genuinely think it’s all worth the money, then why invest so much time and energy into calculating ways to avoid paying what it’s worth to you? If you are only going to university to increase future earnings and see it as a waste of time otherwise, it might be time better spent to consider whether to go to university at all.

I completely disagree with Martin Lewis on this one. He’s treating it as if it is a simple one size fits all “take the loan” solution, whereas there are so many variables.

One thing that became clear when taking tailored advice for DS - if you do take the loan there is no point at all in just taking some of it. Take the whole thing, for all of the years, and put what you don’t use in a LISA or ISA.

How much does it cost to borrow the same amount of money on a 20 year mortgage, or a 25 year?

@Borrowornottoborrow precisely this. This is what I mean about you could take say 10 years of redundancies, travelling, further education and child rearing where you’re barely making a dent, rack up an eye watering amount of interest, which compounds, then end up on a good salary and being beholden to a huge monthly sum potentially until the end of your working life.
I also very much disagree with ML on this one. £27k in the bank on 4% a year vs taking on £15k a year debt on 6%+ interest is batshittery of the highest order except in very specific circumstances.

And it’s the same old same old that yes, you can have a good deposit, but house prices are now such that you also need a substantial wage to buy alone in a lot of the country. Which she might not get if she’s not got the requisite degree to become a lawyer or such.

You can use saved grandparents or other family cash to pay it all off at any time with no 'early repayment' penalty I understand.
So you could get your child comfortably through uni on the 'student loan', then see how they do, what their prospects on graduation are . . and then pay it all off if you want to.
At some point anyway, if it's an inheritance, they will make that decision one way or another themselves.
Hypothetically it's quite likely they might prefer to use it to get a mortgage, since what they'll save on rent will easily cover the 9% they are presumably being charged by then.
This is certainly how my nephew, 30 and just earning enough, now sees it.
But if his gran's money were already gone, he wouldn't have that option.

But by the third year, they’ll have taken on maybe £45k of debt which is already accruing interest at 6%+. So they’ll already owe more than £27k + 4% of compounded interest.

I have wondered about this too.

I flip between thinking it would make sense not to take the loan and then thinking that it might be the cheapest loan she gets to have.

I suppose if your DD isn't going to then need to borrow again later if she spends her inheritance on uni it might make sense.