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.

Just to get this clear - can you pay off a loan early without penalty if your career is going well?

It’s a difficult one: dn has done degree, MA, PhD and is now a SAHM, having never worked and now has no plans to. She is obviously quids in.

I don’t think it’s fair to just levy repayments on workers, or to write off the loan after 30 years. Perhaps the debt could eventually be taken from assets upon death if the former student does not earn enough to repay.

I am also concerned that since the whole scheme seems such a mess, all loans might be written off and then those that paid up will be livid!

I would rather my child doesn’t get in debt if they don’t have to; no matter what Martin Lewis says re being a tax. It is a never ending debt in my opinion which goes higher every year. A monthly payment commitment on top of PAYE and NIC.

I got friends who planned for the kids education so they didn’t have to get in debt,

I agree. It's one area that I fundamentally disagree with Martin Lewis! The repayments for someone earning an average wage are enormous as it takes the full 30 years and you end up repaying more than double the amount borrowed in interest. It's not even a competitive rate of interest - you can get "proper" loans cheaper! It's only OK if you never intend to work enough to make repayments and can wait for it to be written off. Our son took out minimal student loans and used savings/inheritance/gifts from us instead for most of his Uni costs so he's not that heavily in debt.

Mine took the loan. We saw what sort of career they would likely have post degree and then paid it off in the months after graduating. It had already gained 7k in interest, but we knew if we left it another year or so at 7.6% interest it would not be worth paying off. We have no regrets.

They are saving for their own house deposit and a stocks and shares LISA has given them a good head start.

FIL invested a lump sum for the GC when they were young for tuition fees, so they were covered. We lent them the maintenance loan interest free. The interest made on the original invested lump sum covered most of what they had to pay back to us for maintenance, so they were very lucky and their degrees actually cost them just less than £3k each.
We are fortunate enough o be able to give them money for house deposits when the time comes. The idea of unnecessary debt just doesn’t sit right with me, especially as we have sons, who are more likely to pay it back over the lifetime than females.

DD has taken out the tuition fee loan but we are giving her money for maintenance. If we have the money at the end of the 4 years we'll consider paying off her debt completely but our priority is to pay £4000 a year into her LISA.

It's all very well ML saying it's just a graduate tax but I disagree, even after just 2 weeks at Uni interest will have been added to the loan (albeit a small sum at this point). It's crazy (to me) that for some graduates, the interest accumulating each month is more than they are paying off and that they could easily, with the 40 year cut off point end up paying double the amount that they took out.

@Sweetpeasaremadeforbees we made the decision it was either all in or all out as even if you take the tuition fee loan there is still the loan and you will for many years be paying the same amount as the same earner who took out the full loan and tuition fees as it is a percentage of your income over £25k rather than the amount of the loan. It may well stay the same for all 40 years if they are middle to low earners and never pay of any of the lump amount of the loan and just paying the interest. However I get the inclination not to take out more than you need to.

We could juggle things and had saved since she was a baby (and only had the one!) so DD didn't take out either and going into her third year and paying her final set of fees this week has been a relief. I have enjoyed spending the airmiles accumulated too, now ML doesn't mention that in his calculations!

Airmiles?? How do you get those with student finance payments?

Airmiles?? How do you get those with student finance payments?

Presumably by paying by credit card. As I say we haven't paid for the tuition fees but maybe you can use a card. I think we could have paid for DD's hall accommodation using a card although I think we did a bank transfer in the end.

I completely agree with you - I too don't agree with Martin Lewis if you have savings to fund the student loan. As you say if DC are likely to be earning for most of the now 40 years of repayments then they will pay back a huge amount due to the compounding of interest.

That said most people don't have a choice and the student loan is the only way they can afford university so this is a non issue for them. 96% of students take the student fees loan.

There are always anecdotes about people who are SAH parents or work on very low wages for the next 40 years but that isn't the norm for many graduates. Even if they always work in the public sector if end up in senior civil service or as head teacher or senior local government official their repayments will be very high. A lots of lost income for a couple with both having loans.

It is worth noting that this system of financing university education does lead to to more inequality in an ever increasingly unequal society. A proper graduate tax would be more equal. Student loans are in effect a graduate tax the well off can escape.

The newest loans that my DD would be taking out from next year only has an interest rate that is the same as RPI, so will only increase at the same rate as inflation. ML says this is the cheapest loan they will ever have, so even if they take it out and stick it straight in to a high interest savings they would be ok

While quite correct that the new student loans are at RPI but interest rates on savings are less than RPI. Most savings accounts currently pay interest between 2-4% and RPI is currently 4.6%.

I can see that juggling funds as you propose does give you more flexibility in the future as it may reduce the amount you need to borrow for a mortgage. A quick look currently shows mortgage rates are less than RPI so I'm not sure Martin Lewis is correct that student loas are the cheapest loan you will get.

It is all a bit of a gamble as no one knows what their earning over the next 40 years will be therefore how large their repayments will be.

@Borrowornottoborrow however there is a huge difference in loan conditions between mortgage and student loan…the former you are committed to pay even when you become unable to work through illness/unemployment/SAHM etc whereas with the latter, payments pause when your earnings drop. So if parents want to help but can only choose to help with 1 aspect,it may be they are better to help pay mortgage/rent /deposits etc rather than a student loan .

@BeFancyOtter that is certainly true and why all these decisions are so specific to each family's individual circumstances.

There is a difference between what is best value in £ and pence and what makes sense given the respective terms and conditions of different loans.

My dc is in third year at uni - when we had the talk at his sixth form about student loans (early 2023) RPI was about 13 per cent!! So RPI can fluctuate hugely. I understand that the SLC reserve the right to change the terms and conditions of the loan (i think?), so at these times they have capped the SL interest rate at approx 7 per cent or something. I presume if RPI goes really high again then they will cap SL interest rates, but not sure is this is actually guaranteed in the terms. It would be worth checking, if interested. We decided to pay the fees ourselves - but it is a very personal decision. (And yes, our dc’s uni does give the option of paying for the tuition fees by card, through a third party provider on their website, so presumably someone could earn airmiles or whatever from it… although unless paid off immediately would probably incur much higher interest overall than the SL would have…)

I was v surprised to see ML recommending the loans, even if you can pay upfront, the compounding means you will be paying a much higher amount overall.

Why? Now that loans track RPI, theoretically their compounding should match pace with inflation. In real terms the compounding effect should be close to zero.

RPI is a blunt instrument so it's not completely risk free, but it's heavily buffered at the very least.

As the interest rate is pegged to inflation, the "real" value (in terms of the buying power of the amount of money due) does not actually increase. if you have £50,000ish of liquid assets that you could use to pay for a student's fees and living costs up-front, you ought to have access to the kinds of financial opportunities where you could invest that same £50,000 at inflation-beating interest rates. If such investments are successful across the 40 years of the repayment period of a student loan you would then find that your investment fund had outperformed the student loan debt significantly and you will have been better off investing the cash and using the loan, even if the student goes on to be a high earner.

This is a big assumption though. If you wouldn't invest the cash properly then the premise doesn't work.

ML is also accounting for the fact that not all uni grads go on to become high earners, and if you child has a relatively mid-level career and isn't a high flyer the cash option would be more expensive.

@Borrowornottoborrow yes I haven't offset repayments against the £500k. But based on my calculations the total amount repaid would be around £350k. This obviously depends on career path and trajectory. I found a calculator that allows you to incorporate career breaks or periods of unemployment or part time working.

I agree future investment returns aren't guaranteed but 100 years of historical data on equity returns shows that the figures I've used are a reasonable estimate.

The other option is to pay off the loan and invest what you would have been paying every month. But the returns definitely won't beat investing £50k in one lump sum now and leaving it to compound for 40 years.

where do you get that 8%pa ISA compound solidly for 30 years?

This is true that I hadn’t thought about inflation impact, only the compounding of interest at a scary rate. I did think the interest rate was RPI plus some, but maybe not, I haven’t looked at specifics yet.

I guess in same way that my mortgage now looks smaller 10 years down the line due to inflation, the loan might too. Assuming you are paying off more than the interest. Lot to consider!

Well yes, just how likely is it you would be able to leave that money untouched for 30 years and that the average interest earned each year on it really was as high as 8% over that time, in order to end up with that amount? It seems to me we are living in very uncertain times and that is a phenomenally over-optimistic calculation.

To put it another way, the terms may vary, but borrowing is borrowing, and we are heading towards an era of massively increased political, social, climate and economic instability. I wouldn’t be inclined to believe goalposts won’t be moved. You can play games with who you owe money to and what you think the best terms of borrowing are, but at the end of the day, if you don’t have to borrow money to be able to go to university, it is perfectly logical not to.

For me, it is not so much around the opportunity cost of what you could accrue if the £60k was in ISAs for 40 years - it is more about the commitment of having to pay an amount every month - and when dc are in their thirties, with maybe small kids / big childcare bills / big mortgage payments, that extra 9 % (over £24k) will add quite a big pressure onto the monthly budget. And payments last until you are 61… I have to say, my dh is in an industry where it was quite low salaries to start, and in the middle years, but when he hit late 40s, it massively increased. If this happened to my dc, 25 years of compounding SL interest would mean the loan amount would have increased massively, with very little ‘paid down’. Reaching a higher salary in late 40s, say £150k per year, would then mean SL payments of around £12k per year, up until the age of 61 - and payments would obviously increase further as salary increases. It is a big monthly financial burden to have in your 50s.

And this maybe wouldn’t happen to those that start their careers on a high salary - they could potentially pay it down much sooner. But those that start low but end high (maybe academia, as an example?) will have problems.

But no-one has a crystal ball - and can’t really tell what career trajectory dc will have…