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.

@Woollyguru - as I have already pointed out more than once to you, my objection is to your situation being very specific to you, and here you go making it even more specific with yet more detail on how you manage your children’s finances! I doubt it is the norm for a graduate to have their parents managing investments that are in their name for them, so to be given more detail like this doesn’t feel very helpful in a more general discussion, albeit it is interesting to find out how open some children are to their parents saving money in their children’s names, but still retaining control over it. Obviously I have no problem with you doing what works for you - it’s just it doesn’t seem to me to be a model easily copied by others.

Ps @Woollyguru - I really don’t mean to sound critical of your personal choices, as it sounds as though you have a great set up that everyone in your family is happy with and that your children are thriving, so my apologies if you saw it as a personal attack. 💐

I don’t think taking loans for university fees, rent, and other expenses is necessary if you can pay upfront. Loans can be intimidating because they bring debt, which I find unsettling. The thought of repaying for years, with interest making the total much higher, feels overwhelming. I’d rather not put my children through that burden if I can avoid it.

If my children decide to go to university, they’ll attend the local one, and I’d be happy if they chose better alternatives instead of university.

My siblings and I avoided loans by doing whatever we could to steer clear of financial burdens early on unless absolutely necessary. We attended a local university, which was over 45 minutes away by train.

@Walkaround thanks. My dad did the same with me and my siblings, introduced us to investing very early and I'm very grateful to him. The effect of compounding investment returns over 30+ years is incredible, potentially life changing, even when investing quite small amounts.

Unfortunately deciding to attend a local university isn’t always possible due to university admissions criteria. DC1 would have loved to attend our closest uni, but didn’t get a place even with straight As. The next closest offer for the course he wanted to do was 3 hours away.

My DD started this year and I did a whole spreadsheet based on ‘probable earnings (guess!)’. That’s the biggest variable which you can’t predict.

what I learnt is - you are better off taking the loan if (a) you plan to repay it asap ie the loan is very short term/ temporary
or
(b) you think you will hang on to it for 40 years because your career will be low-paid and you might not earn much above the £25k mark

for everyone else with a decent-to-high earning potential the ‘total interest’ you pay on the loan long term is ridiculous!

we have taken the loan but plan is to repay it within the first 1-2 years. Meanwhile we are letting the money sit in a high return account while we sort out all other other financial variables for the next few years.

also we do not want DD to have a loan burden as she starts her career. It will be hard enough finding a job with the state of the economy and AI in the mix!

DD says that most students have loans except for those that came from private schools.

What are these fantastic high interest accounts, because I can't find them and the ones I have keep going down. I'd rather pay monthly by month and be done with it

This is exactly my thoughts and calculations. The amount of interest to be paid back is horrific. I can’t imagine my DC trying to support their own DC through uni while still paying their own uni fees. It’s fills he with horror.

You have to remember too, that most will be earning a lot more than 25k in 20 years time. My first grad role 25 years ago paid 13k. I now earn 4 times that in the same sector.

I had a fairly miserable time as a student, picking a middle of the road university as the top ones I had offers from I couldn't afford the train fare to get to and my parents were going through a messy time in their lives and refused to top up my student grant (as it was then) and as the grant was based on their income and there were no loans I had to make the best of it and work and scrimp. I couldn't afford to go out or socialise, I didn't have the time or the money.

I know this experience flavoured my desire that my daughter would get to enjoy the journey and not just the destination.

I don't regret my experience and am not bitter, it was a priviledge to have had the opportunity to go to University and it enabled me to have a good career. I continued to save even when DH was made redundant and we rented out our spare room to stay on track with the saving plan as I was so determined history wasn't going to repeat itself if it was in my power to avoid it.

DD was able to take up the offer at an amazing university that suits her so well. Life is a journey, not a destination, yes you need to pay the bills and not doss about but I'd rather she was alive than a dead depressed (insert career here which your child would least like to do) which happened to the head boy at my school who tried to please his parents rather than follow his dreams. DD would be crushed if we said she could only go to a local university due to cost. She lives away from home and returns home in the holidays and works but not during term time. She has the time for volunteering plus a couple of extra curriculars and has made some lovely friends which I think she would have struggled to do all that if she was working during term time.

It doesn’t matter how much I read about student loans, I can’t help but think it’s a con and one day they’ll be “mis-sold a student loan” claims. I sincerely hope there is.

My DC aren’t taking a penny in loans, I simply cannot make the numbers add up; borrow £45k and repay £135k. 40 years of debt? So they’ll be helping their kids through uni while still paying off their own uni fees.

Ours were lucky enough for tuition fees to be paid by a GP. We lent them the equivalent of the maintenance loan interest free and paid their rent. The interest on the lump sum invested for tuition by GP since they were about ten was enough for them to use to pay back most of the maintenance to us. I think DS1 degree has cost him £3k. DS2 doing the same.

…. And they both went to state schools throughout.

@CrikeyMajikey I completely agree with you re the huge cost of the student loan. It is a huge privilege to be able to make the choice to pay for DCs uni education. Not an option for most people but if you can then in my view it makes financial sense assuming our DC are aiming to have a career and progress to a managerial role. The lower threshold for paying back has been frozen at £25K so pretty much anyone on the minimum wage starts paying back.

If you are in a public sector role with a medium salary for quite a while your repayments are low but simultaneously interest racks up on your student loan. By the time you get reasonable promotion you are paying an extra 9% income tax on a good salary when as you say you are supporting your own children - and you will do this pretty much until you stop work in your 60s.

I agree it does seem like extortion.

But you do have to factor in inflation. £40k now is equivalent to £130k in 40 years at 3%pa inflation. So the debt isn't being eroded by inflation like eg a mortgage would. You're paying back the same amount borrowed in real terms.

That's based on the above numbers. It will be different for everyone depending on the exact level of debt and future earnings.

This is a good idea; will do similar for our kids as I don’t want them to have huge debts.