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.

Ps this is a simplification. The actual requirement is that your gifts are part of normal expenditure out of income, with regularity being the easiest way of demonstrating the normality of it (imvho).

I presume they only check if you die within 7 years as otherwise no tax is due. Regular income I would have thought if you'd say been paying £20k private school fees then paid £20k for tuition / accommodation at university would be pretty easy to show kept living standards. We weren't but I think could still show it.

Thank you - and this would only be taxable if my husband and I both died within 7 years? Helpful to know even though we are currently 'only' looking at funding University costs

I did this calculation and decided I'm better off investing £50k per child in global trackers in ISAs than paying off the student loan.

They might take career breaks, work part time etc. It's very unlikely they'd work solidly for the full 40 years after they graduate.

This chart gives an idea of survival rates by year - if you are 55 then looks like around 4% of people die over following 7 years though not easiest chart to read.
https://www.adamsmith.org/chart-of-the-week/percentage-of-population-surviving-at-each-age
I would presume it applies if either of you die within 7 years if both gifting money and if one only gifts it the one who gifts it but not certain on that.

Is this based on UK data or world wide? It looks a bit frightening e.g. over 10% of people die around age 65 - although life expectancy is obviously higher than in the past.

Its UK data and I think a lot of people don't consider it and assume they will live to normal life expectancy or longer.

If I look at people I know IRL I can see that quite a lot die between 40-65. Definitely 10% or more. I was in a class of 25 at school. I know 3 have already died and those are just the ones I know of. All 3 from illness rather than accidental. And I'm only 54.

If you inherit everything on the death of your spouse, then there is no IHT to pay. Also, you inherit their nil rate band. So yes, it is my understanding, if that is the way your wills are set up (that everything goes to your spouse), there will be no IHT to pay until you both die, with the seven years being measured from gift date to date of second death. I’m not an IHT specialist, though!

NB, there has been a lot of talk about the Chancellor changing the IHT rules. Possible changes include putting a lifetime limit on gifts that can be made IHT free, or increasing the 7-year timeframe, or stopping the taper relief (the IHT % currently reduces gradually over the 7 years after having made the “potentially exempt transfer” - ie gift).

Thank you - you know more than I do anyway, wasn't even sure what IHT stood for ;). I haven't given this much thought, including the average age of death (!) but useful to know when planning for the future, and thereafter it's probably best not to overthink it or it will just create unnecessary anxiety.

It’s useful also to know that if you are married and everything goes to your spouse on your death and then to your children on their death, including the home, this can result in up to £1million IHT-free, provided the whole estate is worth less than £2million, because passing on your home to your children when you die also increases the nil rate band (IHT-free amount).

I'd open a LISA and put 4 grand a year in that and the government will pay 1k a year towards buying a house. But the rest in a high interest for a year until you need it to pay in another 4k.

I didn't think about the IHT headache while preparing the what-if analysis spreadsheet (available here). Thanks for bringing this angle to this discussion. Here are my thoughts on reducing the IHT liability

Uni Expenses rough guide
Tuition Fees: 9535/ yr => 28,605 for 3 years
Maintenance Cost: 12K/ yr - 5K Finance => 7K/ yr self-finance

Note: The student finance available for maintenance cost depends on the household income. Use this calculator to check your eligibility

Total Cost: 28605 + 36000 = 64605 => 65K
Student Finance = 43500
Self-Finance = 21500 OR approx 7 to 7.5K per year

How to transfer 43500 over 3 years OR 14500/ yr with minimal IHT liability to DC?

• IHT free gift allowance 3K/ yr.
• IHT free gift allowance can be carried forward for one year.
• Assuming the allowance is available to both parents.
• Year1: 12K (considering 1yr carried forward allowance) + Year2: 6K + Year3: 6K = Total 24K
• Short fall = 43500 - 24000 = 19500
• Transfer 19500 as lump sum that falls under ‘Potentially exempt transfers and the seven-year rule’

Invest 43500 into ISA/ LISA Cash or Investment ISA or SIPP or combination of those, depending on your liquidity needs (SIPP is not liquid)

I would love to know your thoughts on the above and ideas for further improvement.

For more on IHT and 'Potentially exempt transfers and the seven-year rule' refer the following links

Disclaimer: I am not a financial advisor or IHT specialist.

References
[1] https://amberriver.com/financial-gifting/how-to-financially-support-your-child-through-university/#:~:text=What%20parents%20can%20do,not%20go%20significantly%20beyond%20them.
[2] https://www.moneysavingexpert.com/family/inheritance-tax-planning-iht/
[3] https://www.gov.uk/inheritance-tax/gifts

I think IHT can be quite dependent on your exact circumstances but there are plans to bring pensions into it and then around 10% of the population will be affected. IHT is also a easier tax to target when looking to raise revenue and with increased defence spending likely to be needed the money will need to come from somewhere. Its best to take individual financial advice especially if you are also affected by foreign rules and / or have a disabled child - we have both those and it makes it super complicated.

If you both have wills that just pass to your spouse or are under the taxable thresholds its only an issue if you both die within 7 years and are over the threshold. As the rules may change its something you need to review if affected every change. You also need to consider if you give your child money how sensible would they be with it and are you absolutely certain you won't need it. The pension change will hit people who die before retirement age hard if they have larger pensions as the full value of the pension will be included if they haven't started taking it unless goes all to spouse. The allowance does go to spouse but it depends how much you have combined as to whether that just delays the issue.

IHT only comes in upon the 2nd death, meanwhile, there are too many twists and turns, it's not something that I have or will take into consideration for the purposes of student loans.

It can come in from the first death if money is left to the children over the limit rather than all to the spouse.

i’m a lawyer. If she is planning on corporate law and likely to be a high earner (relatively junior salary can top 6 figures even in regions). It’s paid off at 9% (I think) out of your taxed salary - colleagues are paying £550 plus a month but even that takes a long while to move the dial on the interest accrued since first borrowed. That is a huge amount of money. at that point you are better off trying to pay it off early. Not as may professional women become sahm and remain sahm now - life is too expensive and certainly at my firm most women return after maternity, often full time. I too am on the fence about the best thing to do. I feel like we are chaining our children in debt. I suppose the answer is what return can you get on that money year on year. If it’s higher than the annual interest then take the loan or if you think dd won’t work in her chosen career.

No iht if you are paying out of income rather than capital.

If you invested £50k in a global tracker within ISAs for 30 years at a compound rate of 8% pa you would have £500k. That's in nominal terms so not factoring in inflation.

Would a graduate make payments totalling £500k before the loan is written off or paid off? I don't know the answer but I don't think so.

I'm very much leaning towards the investment option. Once you pay off the loan you can't get the money back and who knows what might happen in the future with jobs etc. Especially with AI which unfortunately means that DC are likely to experience periods of unemployment and/or low pay.

But interested in everyone's thoughts on this.

I wouldn’t take the loan. Cash flow Uni if at all possible.

If GP's said money to be used for DGC for uni that's what I'd expect her to use it on.

@Woollyguru this is certainly one approach - I’d say it’s a very individual decision which depends on individual family finances, your risk appetite as well as any ethical constraints you have towards investments. There is no guarantee of an 8% return on an ISA even with a high risk appetite and no constraints as a crash may well happen at some point in 40 years (length of loan).

As to the maths I’m not sure you’ve offset the student loan repayments. I.e. From your £500k you’d need to to deduct all the student loan repayments over the 40 years.

We decided to use the funds we were fortunate to have so DC didn’t take student loans. They will be saved 9% income tax on everything over £25K. They can then save / invest that.

This seems relevant
https://x.com/MartinSLewis/status/1973394932925669659

Don't agree with ML at all, loan being written off after 40 years, might as well just say for the rest of your working life, also I'd like to see a high interest (ISA) saving account that pays better interest than the interest rate charged by SFE.