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.

The thing is, there is more than one way of calculating inflation. This is an old article but may be of interest: https://amp.theguardian.com/education/2018/jun/28/student-loan-interest-rates-rpi-retail-prices-index-inflation

Here are the figures using the student loan calculator. You would owe around £157,000 but in today’s money that would only equate to what you originally borrowed (£42k).

Using a simple compound interest calculator, with zero repayments

https://monevator.com/compound-interest-calculator/

Link to the calculator as used by @WhyIhatebaylissandharding

Why is the figure using @WhyIhatebaylissandharding 's simple compound interest calculator of 351,99.44 more than double @Tearsofthemushroom 's student loan calculator of 157,334?

My calculator assumes zero repayment, other student loan calculators factor in salary growth and therefore some repayment - reducing the impact of the compounding.

I am getting much higher final figures after 40 years (plan 5) with zero repayments using other student loan calculators. Between 300K and 680K. The RPI assumptions may be different but the much larger sums are eyewatering on an initial loan of 50,000.

https://www.yourstudentloancalculator.co.uk/
https://www.studentloanrepaymentcalc.co.uk/

I am probably using the calculators wrongly. Not sure what to believe.

Had a quick look. The first calculator doesn’t make obvious what RPI rate it is using. The second has it automatically set at 8% a year which is very high.
however, none of this really matters as the money will still have the same value.
As an opposite example, I bought my house in 2008 for 300000. If is now worth £500000. Sounds like it has gone up in value but it has actually only kept up with inflation.

The current Plan 5 loans have an interest rate of RPI flat for the entire 40 years [unless the govt changes the Ts & Cs]. Do you have an earlier Plan?

Yes, RPI is only really a proxy for what we call inflation, CPI is another. Govt tends to pick the one that gives higher numbers - RPI - when we owe them and the lower one - CPI - when they're paying us.....

RPI flat is much better for borrowers than the interest rates charged on earlier loans, especially compared to the loans where the interest rate actually went up the more you earned - yikes!

Yes, my dd is on Plan 2 (the 30 year one that came just before Plan 5).

Ah, those are horrible because the interest rate goes up the more you earn and could be significantly above inflation so there's a real cost which grows the longer it's outstanding ... although the write off is earlier (after 30 years vs 40 years). So the decision of whether to pay off early (if you can afford to) is very much linked to your DD's expectation of future earnings. If she's going to be well paid, then she will eventually pay it off in full so it's probably better to pay it off sooner rather than later to limit the rolling up of interest. If earnings are uncertain then it may be better to let it run and use the money for something else. It's tricky; you need a crystal ball.

Those posting that an interest rate in line with rpi means you can ignore the fact that you pay tens of thousands interest are assuming that wages rise at the same rate as inflation. This is by no means guaranteed.

I totally get how you feel - I am old enough to have been able to go to university in the late 1980s with no tuition fees or loans and a mix of parental contribution and grant which added up to a bit more than a full grant, and the huge amounts in loans do sound scary to me.

However, even with a law degree, if your DD currently hopes to qualify for a legal career she will need to study for at least another year. Also tuition fees for the first degree are predicted to go up, and accommodation/housing and other maintenance costs might increase. Getting on to post degree legal qualification courses and getting a training contracts are very competitive too and course fees can be high, especially, I gather, for the more prestigious training providers.

I think she should make sure any inheritances/savings are earning a decent rate of interest and take the student loans, which if the minimum available, she may need to use savings as well as the loans. If everything goes very smoothly and she starts a career with grandparents' money etc still available she will have more choices/flexibility, whereas if she doesn't take the loans and uses the money, it might be more difficult/expensive to borrow for postgraduate study, and jobs taken to get experience between training stages or while trying to get the right place/position. Then there are possibilities of career breaks, changing housing needs or just changing her mind

But if they didn’t have the loan, they’d be benefitting from the increase in wages without having to repay their loan and could save benefitting from compound interest instead.

Exactly. As the stats show, wages havn’t risen in line with inflation over the past decade or two. Fair enough that means student loan repayments won’t have risen but over that time the student loan interest is building up and probably accruing at a greater rate than the loan repayments, so the debt just gets bigger.

my DD is off to uni next year and has a sum of money available due to her dad and me saving for her since birth in an ISA. I have said not to spend this money on Uni costs but to save it for a house deposit. Her older sister and husband (my step daughter) had to rent for significantly longer than they wanted to due to not having a house deposit. This cost them thousands of pounds over the years as their rent was more than their mortgage. DD is lucky that her dad and I will be able to help out somewhat with fees and living costs though, although not the full
amount, so she will have to take out a loan at some point.

So if the interest is just pegged to inflation, then that is true of savings accounts too, which generally, after 12 months, accrue less interest than the loan and so it doesn't really gain but just stands still and actually declines ...one might as well just pay it upfront - if you can afford it. Nothing anyone has said makes a compelling argument against that course of action.

Nothing anyone has said makes a compelling argument against that course of action.

I feel the same way about using the £50K for a property deposit, when it’s an either or situation. OP has updated to say she’ll help her daughter with a deposit. I think most if not all of the people saying use £50K for uni fees and costs are out of touch with the rental market now. Do you really want your kids paying a huge proportion of their incomes to pay someone else’s mortgage for years, whilst trying to save for a deposit and living with the insecurity that comes with renting? That gap between house prices and wages is going to get larger. Ideally it would be nice to pay for both but not many people of course have £80K + sitting in various accounts as rainy day fund.

@north51 thanks for taking the time to explain. Dd is doing a creative degree so not expected to be a high earner over her lifetime or in full employment. That is why she took out the student loan to begin with (on Martin Lewis' reasoning). However, reading your and @WombatChocolate 's great posts, I think we will pay off her Plan 2 student loan as soon as she graduates.

She did not lose out because we put the tuition fees into a Stocks and Shares ISA which has grown greatly over the last 2 years. It was a lucky accident and not by design. She is autistic and I don't think can manage a freelance creative job and complicated tax/student loan admin. Therefore, even without the benefit of a crystal ball, I am persuaded that paying off her loan is the right call.

Don’t take the loan. Im plan 2. Probably one of the most favourable plans.

3k per year tuition plus 3k maintenance a year. Did have to take 5 years as a long course.

I checked 3 years ago before interest rates rocketed. I owed nearly 70k.

Probably nearing 100k now!

No this isn’t true because RPI is much higher than the inflation of HE costs.
“the equivalent of the same amount they borrowed” would only apply if HE were as price elastic and subject to inflation the same way as cost of a luxury handbag.

Over the last forty years, the RPI reflects a quadrupling of £ needed to buy the average retail good or service. So what you could buy for £1,000 in 1984 now costs £4,353

HE/ University isn’t a retail service. The cost of it doesn’t follow the RPI and isn’t included in its calculation.

From 2012 until 2025 Uni fees were frozen. The price index for that would be 0%

But the RPI for the same time period was 158%

If the RPI had applied to Uni tuition fees, then they would have increased from £9,000 per year to £14,295. But instead they have only increased to £9,250 as of 2024, and £9,535 for 25/26

Uni fees have a much lower price index from 2012-2024 of 2.8%

So is paying an extra 158% the equivalent of paying an extra 2.8%? Absolutely not.

The ML example of a trolley of groceries today versus the future to convince readers that student loans are a great idea and you’re only paying back what the education would cost anyway forty years in the future only highlights how ML o is out if his depth as inflation in consumer goods is measured by the CPI, not the higher RPI.

The compounding of interest of the student loan feels like a lot more too, but it's going up in line with inflation, exactly like the basket of shopping.

No it’s not. The costs of Uni and the costs of a basket of shopping aren’t part of RPI and their costs go up slower. Uni very slowly, and a basket of shopping with the CPI.

Because @Tearsofthemushroom calculator deducts the loan payments made for 40yrs that correlate to the debt being £157k instead of £351k by the time it is written off. The debtor will have paid off close to £200k on a £42k loan.

Real estate has its own inflation index- its what pushes RPI to be higher.

RPI = Retail Price Index. - everything we buy including housing costs (rent, mortgage interest), petrol, the works

CPI= things we buy excluding housing costs and luxury items. Basic life essentials like food, clothing,

CPIH= CPI plus rent.