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.

And I do wonder what the national minimum wage will be in 10 / 20 / 30 years…? If everybody starts on a salary of £40k +, and salaries of £100k + are achievable by a large proportion of people, that will change the whole landscape a lot - when everyone who works will pass the threshold and start paying? When I qualified in a highly professional role (after 7 years in university / training) my starting salary was £11k pa…. (mid 1990s). I suspect the equivalent starting salary in the same role now is probably over £30k… so in my previous sector, starting salaries have trebled over 30 years…

That’s really interesting. I wonder what the cost to you would have been in taking out finance each year to pay for the fees / rent etc as they occurred? I wonder whether it is cheaper paying it upfront, rather than paying it off after graduation (when the loan amount has increased by 7k). I wish my maths were better, but am too tired to work it out!!

My DC always thought they would have a job in the charity sector or aid work, hence we suggested they take the loan and we use the saved money for their house deposit. As it turned out, after 3 years at university, they looked at transport consultancy work for a massive civil engineering company, logistics for a big multi national and going in the military as an officer. All are well paid with a good career structure. DC, 3 years out of uni, is now earning 50k +. (They should be paying £2250 a year in student loan repayments, but the interest would be £4560 a year, so the loan keeps going up).

Therefore, we are pleased we paid the SL off. DC has no accommodation expenses so they are saving for their own house deposit. We just view it as getting some inheritance early, not when they are in their 50s and well established.

Also, it is a personal debt. If DC ever get divorced in the future, a partner would not take on half the SL debt, but would be entitled to half the house deposit.

@Walkaround it's not an annual return. It's the average annual return over 40 years. Big difference. You can read up about average stock market returns below. I'm talking about nominal not real returns btw.

https://www.ii.co.uk/analysis-commentary/what-120-years-stock-market-data-tells-us-about-where-invest-today-ii527529

The other factor is whether DC are likely to work for 40 years or retire earlier than that. If they are likely to receive a decent inheritance chances are they'll stop work after 35 years so won't make any further payments.

I personally would prefer to either invest the money for the DCs or add it to whatever we were going to give them for a house deposit.

@Woollyguru That’s really interesting - would you invest it in their names, or in yours? As I suppose if it is invested in their names then you would have no control over it, and it could get spent, very early on! (That happened to someone I know, who (following divorce and sale of marital home) gifted £30k each from the house sale to their two children (both aged around 20 / 21 / 22. One put it towards a house deposit later on; one used it to move out of the parental / step-parental home straight away into a rental flat, and it was gone within 12 months, and then they moved back in to the parental / step-parental home. If it was invested in your name then I suppose you have the potential problem of it then becoming part of your ‘estate’ for inheritance tax purposes, and would you then be paying tax on the investment returns for the 40 years it is invested? Then you would have to gift it, ensuring this happens at least 7 years before you die… all very complicated!

@Woollyguru - I said myself it was an average… My point remains, it is ludicrously optimistic to assume all the money will remain untouched, untaxed and invested in the stock market for 30 years. My point also still stands that we live in particularly unstable times atm, so heaven knows what sort of inconvenient time the invested money might actually be needed - the stock market may in the long term have been a good place to invest, but money is sometimes needed urgently at short notice, particularly at times of financial crashes and high unemployment. You are talking entirely theoretically, not realistically, imvho.

On plan 5 you repay 9% of income over the £25k a year threshold so for anyone going into a high paid job it will be far quicker taken back - if someone was on say 3 x tuition loans and 3 minimum maintenance loans and earned £100k (minimum required salary to get out of bed on MN) it could all be repaid if they worked around 5 years.

RPI is also almost always higher than CPI which is the generally quoted inflation rate - 0.8 percentage points higher in the year to August.

There's also the issue of taxation on gains though people's circumstances will vary but ML analysis seems to assume everyone will use tax free savings for this purpose whereas they may already be used up. Plus its highly likely taxation will rise in future.

I find an 8% future growth forecast very high and normally something like a pension fund would have a low, mid and high forecast and low can be 2% or 3% which might well be below inflation. Vanguard have done some 10 and 30 year forecasts here though forecasts are almost always incorrect https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/vemo-return-forecasts.html#:~:text=The%20chart%20and%20table%20below%20reflect%20our%20outlooks,running%20of%20the%20Vanguard%20Capital%20Markets%20Model%20%28VCMM%29.

@Cranmer that is very interesting and sounds very sensible, but I'm guessing your DC were on previous plans which had interest rates set to higher than RPI, whereas anyone taking out a new loan now won't. And my DC is desperate at the moment not to move back to our home town so free accommodation for years is unlikely.

We will definitely be looking at it again after graduation, but taking the loans for now makes more sense to us than sacrificing their house deposits up front.

That was our thought exactly.

We are empty nesters, so I will let you work out what career they took up.

@Walkaround why is it ludicrous to assume the money will stay untouched and untaxed for 40 years? It will be in ISAs (rules may change I know but we can only go by the rules today).

We have enough to give DCs a deposit for a house and without a big mortgage they should be able to manage even with loan repayments. At least this way after 40 years they'll have £500k each.

Your point about times of unemployment is exactly why I don't want to pay off the loan upfront. You only pay out of earnings so won't pay anything whilst unemployed which will reduce the amount paid overall.

Also everyone should have an emergency cash buffer of 6 months of expenses anyway to cover periods of unemployment. The DCs know investing is for the long term and over 40 years if you're in global indexes you will make average annualised returns of 8% based on over 100 years of data.

I am fully expecting the DC to be unemployed at times because that's the reality. I took time off to be sahm and now work PT so if I did have a loan it's likely I'd not be paying anything for many years. Which reduces the overall amount paid as the 30 clock keeps ticking, extra years don't get added to make up for times when you aren't making any repayments. DH has been made redundant a few times. Over the course of a 35 year working life it's bound to happen.

Ultimately even if you only break even and your repayments equal the value of your investment after 40 years you still end up with £500k.

The other option is to invest the amount you would have paid in loan repayments but you'd have to be very disciplined and keep up payments for 40 years which is much harder than just dumping £50k in ISAs over 2 tax years and leaving it there. And if you invest monthly you won't get the same return anyway.

I just don’t understand ML on this one. i think it’s particularly the case for your DC where they have a lump sum they can use. Yes, they might be able to use the money instead towards a deposit or for travel or something but, personally, I would rather be able to cut my cloth appropriately in the future. I would rather have all of my income each month (less tax etc) and decide how to allocate it to my mortgage, pension etc rather than have the government take a large chunk of it due to the accrued interest.

If you ever get a bonus, you pay 9% of that back in student loan as well as the usual tax. ML spoke about this on his recent podcast.

I’m unclear who is in investing the money here, @Woollyguru - you or your children? It will take 3 years of investing, not 2, for the children themselves to pay £50,000 into their own ISAs, given the £20k limit per year and assuming the limits remain as they currently are. As for money you are saving for them, who knows how IHT rules are going to change, but one possibility mooted is a lifetime limit on IHT-free gifts, making giving the money away now more tempting - but then you can’t control what they do with your gift, unless you set up some kind of trust. And tbh, I don’t think the last 100 years actually are a good indicator for the next 40, as you are not expecting the money to be invested for 100 years, and, imo, the next couple of decades are looking distinctly unpredictable, and life after that even more unpredictable, but with pretty much everyone seeming to be of the opinion that US equities in particular are currently massively over-valued and due a dramatic revaluation. I also cannot see anything in your own link to indicate an 8% return is realistic, rather than massively over-optimistic, anyway. It’s fine if you want to take the risk, but it is clearly not a risk-free option to assume you’ll make a profit out of borrowing money and paying it back over 40 years, hoping the political situation doesn’t move the repayment goalposts, whilst simultaneously investing money and assuming you’ll make a guaranteed big profit from that.

@Walkaround it's our money that's being invested. The DCs already have ISAs which we've been paying into which we'll continue to do so it's nothing different to what we've been doing for years anyway.

We can't control what they do with the money but they're very sensible and we've discussed all the options together and they're happy with the money being invested instead of paying off their loans. They can see for themselves the returns they've had so far over many years.

If there's a huge crash it's even better as we'll be buying in at much lower valuations.

And the added incentive is to gift as much as possible as soon as possible before the rules change if indeed they do. I doubt very much if any restriction on lifetime gifts will be retrospective.

It sounds, in other words, @Woollyguru, as though you have already paid an amount equal or greater than your children’s university tuition fees and maintenance loans to your children over many years prior to them even thinking about university, and will continue to make regular gifts to them from your income, and it’s none of your business whether or not they take the student loans.

@Walkaround that's a very odd thing to say. We discuss finances together as a family and have done so since the DCs were mid teens as we were coming up to the point where they'd get control of their JISAs.

We discussed whether we should pay off their loans but when we looked at various online calculators with several different scenarios it was obvious investing a lump sum was the better option. We're all happy with the decision and nobody including the DCs sees it as only the DCs business simply because they're taking out the loans.

@Woollyguru - it’s not an odd way of looking at it, it’s just a legal fact. You are also still assuming the money will remain untouched and invested for 30-40 years, implying you expect your children to have plenty of income and capital beyond that invested amount for all their needs during the intervening 30-40 years. As repayments on the new student loan plans kick in at close to minimum wage and continue for 40 years, and savings affect benefit entitlements if you go through workless patches, I would want to calculate how much instantly accessible income I could get from my investments during the 30-40 years I would rather not be touching them so as to accumulate the £500,000 capital my spreadsheets have promised me, and would like that income to be greater than the income lost to student loan repayments while working. The final capital sum in 30-40 years is not the only consideration.

@Walkaround i think you're assuming DCs are only being gifted £50k when it will actually be far more than that. They know the difference between money that's being invested for the long term which shouldn't be touched and money that's for short term/emergency use which should be kept in cash.

And if you don't invest your money in equities what do you invest it in? Cash is guaranteed to lose you money over the long term because of inflation.

@Woollyguru - I’m assuming no such thing - read my posts. I specifically said it sounded as though you had been gifting lots of money to your children for years and were planning to continue to do so. I’m pointing out that you having given your children a lot of money already, so that they themselves could afford to pay their university fees upfront and then some, isn’t really relevant to people who are asking in isolation whether they should try to pay their children’s university fees for them. It is self-evidently the case that the more money you have, the more money you can invest in the stock market and not need to touch for 40 years. You, however, were only saying what you expected to happen to the £50,000 as though anyone with that much money in savings could keep all of it in the stock market for 40 years without needing to touch it.

It is also about peace of mind.

A parallel example from many years ago is that we found ourselves able to pay off our mortgage and the accountant said to continue the mortgage because of various tax advantages.

We still paid it off. There was this incredible lightness of being that followed and sense of security.

It would be good for your DD to set off in life knowing that every penny she earned was her own.

@Walkaround even if all we had to give the children was £50k I'd still rather invest the money than pay off the loan.

I remember being in my early 30s and having a mortgage, nursery fees x 2 and an extension being built. We needed every penny. We ended up losing 3 grandparents and both my parents in a 10 year period. We inherited money in our late 40s and early 50s when we are financially settled. What is the point waiting until your children are 50 to give them wealth, when you can make life easier for your adult children in their 20s and 30s?

You are confusing who is investing the money again, @Woollyguru, where and in whose name the money is saved, and how much control the donor might want over how the money is used. You have made the choice from when your children were young that they would have direct access to a lot of money from a young age, reflecting a confidence on your part that you would not potentially regret that decision. Others might feel more comfortable with saving money for particular purposes - often university costs and house deposits - and not just giving that money to their children when they are still teenagers to do whatever they want with.

@Walkaround I'm not confused at all, I wonder how you think you know so much about the set up within my family through a handful of posts on MN?

Even though the money is within the DCs ISAs it's effectively on a trustee basis. The DCs and I both have the account login details and I manage the investments on their behalf.

For day to day spending they're self sufficient. DD has graduated and is working full time and DS has started uni and also has an online business to supplement his maintenance loan.

Everyone is happy with the arrangement, it works for us but clearly for reasons known only to yourself you don't like it!