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.

What about costs of further study/early career costs after doing a first degree in law? If OP's DD actually wants to be a lawyer further study and training are essential, starting with the Common Professional Entrance year and including training contract or pupillage - and progression to full qualification isn't automatic with each stage being really competitive (my sister is a solicitor and I used to be a legal secretary - I wasn't looking to qualify but I worked with quite a few people who were, or who were still looking for a job/career progression).

I'm not claiming that my answer - take the loans and decide how to use the inheritance money/other money after finishing LLB (first degree in law) - is "right" or somehow irrefutably compelling - I think this is a genuine dilemma and the best answer for one student/her family might not be the same for others. But I would be interested in responses, including disagreement, and why.

We will have to make lots of decisions about borrowing money and using savings over the next few years as my sons do A levels and GCSEs next summer, and DS1 hopes to go to university next year.

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.

I think this is right. Me and DH are of an age where luckily there were no student loans. However, looking at his career (he's mid 50s) for about the first 15-20 years his salary wasn't massive so were he now on the plan 5 he wouldn't have paid huge amounts for those years (although compound interest would have made the total amount he owes pretty large compared to what he actually borrowed). However about 10 years ago mainly due to his company paying for him to do a Masters, his salary has shot up and his loan repayments would be ridiculous up until he is about 62.

That I think is the problem (ideal for the government actually), graduates will build up a higher debt when they're starting out because of all the interest and low repayments. Then if or when they start earning a really good wage later in life they'll be paying quite a chunk every month. I reckon that most students who take the loans will be paying for the full 40 years.

Personally, when DD hopefully goes to Uni next year she won't take the maintenance loan, we'll pay for accommodation and a certain amount for food etc. Tuition fees, we'll play by ear, depending on how much money we have at the time. DD is lucky to have lifetime savings and two inheritances that she can use for a house deposit if she wants.

This isn't the way qualification as a solicitor works anymore.

Looking up how to qualify as a solicitor, I see that there have been changes, but there is still a need for postgraduate study, substantial exam fees and appropriate experience.

That’s unlikely to be an issue for us personally but it’s a worthwhile point in general since funding for postgraduate courses is different

My view was to do what myk parents did - they funded whatever courses we chose eg I did law and my parents funded the post grad law - rent etc. My sibling is a doctor - longer course than law - my parents funded that (other than any minimum grant we had). I have done the same with any of my lawyer children who did not have a law firm funding post grad (most law students are not funded although one of mine was by her law firm).

For me paying university costs was about the same as school fees so whether I carried on 3 more years through university or 5 more years through university and 2 year post grad law was just continuing the pain - it was out of income not life savings.

sorry, but you’re making the wrong comparison here. The specific inflation rate of HE is not relevant. The question is what is the cost of borrowing x today at RPI flat. As others have said, RPI is only a proxy for inflation and there are other measures that may be more relevant to an individual’s circumstances. But the specific rate for HE is not relevant as they are buying their education today…

Sorry that was a reply to an old post that was emphasising the inflation rate of HE.

Why on earth would you sign her up to paying 9% additional income tax for up to 40 years if you don’t have to?
pay the fees and let her graduate debt free.

I am 46 and after university and 25 years of average career of research scientist, I am now on £70K salary (many of my colleagues earn this much now).
The simple math is, that should I have taken this plan 5 loan, I would now have paying £4K per year for another 12 years, which is £48K. I calculated that over 40 years I would pay total £110K or roughly twice of I would borrow. It is almost my mortgage in North-West taken 20 years ago!

Depends on what she’d use it for? I used mine for a flat deposit and don’t regret to. By the time I was earning high enough to pay back, I was married and went part time
not long after. I’ll never pay it off now as it’ll be wiped by the time I go FT.

I think it depends on how you write your spreadsheet. Ours includes an assumption that a lump sum is either spent on uni fees or a house deposit. The option where the student keeps it for a house deposit, and therefore starts paying mortgage rather than rent several years earlier, leads to them being £250k better off over their lifetime. Obviously they spend more on uni costs by taking the loan but that is very much more than offset by the years of rent they save. No model's perfect and not everyone wants to leap to buy their first home young, but you get different answers depending on what you put in the model. I think it's important to include what else you will do with the money if you choose not to spend it all on uni costs. Of course if you can afford to pay for uni and still easily have a house deposit, that is a different call.

I don’t know but I do know that the interest from year 1 is high now.

Though not on a Plan 5 loan which is set at RPI. Though at the price of a lower income threshold for repayments and the forty year term.

@boys3 We we’re just unlucky! 😬

I have put int a simple spread sheet that allows you to compare self-finance vs student loan on plan-5 (interest = RPI). Idea is simple compare the option of putting away money (same as the loan amount) in to ISA and compare the balance of the ISA Vs Loan Payment/ Balance over a period of 40 years.It allows you to play with the inputs such as loan amount, interest, startign salary, salary growth per year to see how long will it take to pay off the loan. Assuming RPI stays around 3.5 to 4% average (like how it was over last 30 years) and you put away money in ISA (investment isa not cash), giving return of 5 to 7% over a long period. You are better of investing money into ISA for simple reason. It provides you liquidity and freedom to choose what you want to do with your money, pay off loan (any time if you like), pay for house deposit or anything else. Find the spread sheet link below, hope you may find it useful.

https://docs.google.com/spreadsheets/d/1ccksLCY2wZcvFQY_9Z1JxuiPRerHuWoj/edit?usp=sharing&ouid=114939872605966074914&rtpof=true&sd=true

I realise this thread is almost a year old, but it is worth emphasising that being accepted onto a law degree is by no means a guarantee of a secure or well-paid career.

According to the Law Society’s own statistics, fewer than one in four law students ultimately go on to qualify as solicitors.

The growing use of generative AI is also beginning to lessen the demand for trainee solicitors within law firms, as many of the routine tasks traditionally carried out at the junior level are increasingly automated.

We are considering paying it all upfront and this thread has been really useful in thinking of the pros and cons. Can I just check though if you can gift money for student loans including living costs without any tax implications?

You can gift money for students without tax implications as long as it comes out of income as opposed to savings.

https://www.gov.uk/inheritance-tax/gifts and https://www.money.co.uk/guides/how-do-i-gift-money-without-being-taxed

If you can't say its out of income then 7 year inheritance tax rules apply. This would be my concern about gifting money for a house deposit instead (the government also needs to increase tax take and inheritance is an easier one to go for) plus you put loan instead in a SSISA then capital is at risk. Also house deposit if get divorced might be implications. We paid the tuition fees as only one child and so its out of income and no 7 year rule. House deposit all in one go more likely to be subject to 7 year rule depending on surplus income (you may need to show can maintain living standards - we are giving £19k a year so would need to show you had a spare £57k from annual income which we don't) - plus there's no guarantee on tax rules in future and they aren't likely to reduce.

Also need to consider with house deposit if your DC doesn't want to buy a house until say 30 (quite normal age to buy first property - maybe want to work abroad first, find a life partner, location stability) then will you still be working and at what income. Most people assume they will live another 7 years but they don't always.

Thank you, that's really helpful and we could absolutely say that it would come out of income. What I don't completely understand though is the 3k gift allowance. Is it basically saying that we could gift as much money (outside of education) as we want to as long as we don't die within the next 7 years? Or is it better to gift 3k a year to build up to a deposit in the future, rather than waiting until DC is ready to buy their first property some time in the future and gift a larger sum then?

Yes currently if you live for 7 years after giving the gift there's no inheritance tax to pay whatever the amount. Obviously tax rules can change in future.

So sorry but I don't fully understand! So what is the 3k amount all about then? And what about what you said about needing to show you can maintain own living standards?

All the rules are in here:

https://www.gov.uk/inheritance-tax/gifts

The £3k annual amount would be tax free if you die within 7 years. The showing you can maintain normal living standards is the rule but don't think there's any checks on that. We haven't had any though we can maintain living standards just about.

There is a certain amount anyone can give away each year that is exempt from IHT - that’s the £3,000.

The gifts from income thing is separate from that - you can give away as much as you like exempt from IHT if you are making regular gifts from income. In other words, it cannot be a one-off gift, and it only counts if you can prove the money is out of income not savings and that the regular gift giving has no effect whatsoever on your usual quality of life - ie you don’t have to cut back on your usual holidays, treats and other expenses.