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.

Martin Lewis does not factor in the emotional benefits.

Some people do not like debt. We don't, so buy secondhand cars, phones etc outright and keep them for as long as we can. Not something we have spent time calculating but it will have saved us loads of money over the years and helped with mortgage affordability calculations.

We, with some help from GPs paid for DC. It meant that our car is now 20 years old, and that holidays were cheap. (Covid travel restrictions helped.) DC also helped by being frugal and spending our/their money carefully. (Coach rather than train, taking lunch/coffee into college, looking forward to a big night out rather than clubbing three times a week, cleaning the rental flat so you got your full deposit back etc.)

The reward has been that they started their working life with a clean slate. It has meant that DS has not had to watch his debt rack up when he took a six year PhD. It has meant that DD, who is in a low cost part of the country, was able to buy a house in her first year of working.

I find the argument that you should take a loan because if you end up in a poorly paid job you won't have to repay, odd. It would be entirely up to DC whether they choose to, say, undertake aid work overseas and earn a pittance. But 18 is too young to know, and it is then a long time till you are 67. Not taking loans, if you don't need to take loans, is simpler and lower risk. A DD might find themselves mid-life having to retrain because they find themselves as sole bread winner. Much better if they don't have the penalties of huge, and accumulating debt. Or DC might find themselves in a high cost area where every penny needs to be spent on mortgage or commuting, and that marginal income, otherwise spent on loan repayments, really matters.

Paying for DC did involve some belt tightening. DM was able to contribute as tax rules allowed her to gift money to GC for education out of income - and I worked hard to keep her out of a care home, a huge saving, and to rent out her main home when she moved to sheltered housing, allowing her the income needed. Having DC start their adult lives without debt has been worth it.

Debt is a trap to be avoided at all costs. They could put the interest up, change the terms, they will do as they please and debt is how the west controls the population.

Like a mortgage? So it’s better for us all to rent then, following your logic?

Don't be ridiculous - if you have savings put them down as a deposit and then get a mortgage for the rest to reduce the debt. Very few people have the cash to buy a house, OP's child has the money to pay and NOT get a loan. Some people get trapped by debt thru no fault of their own but that does not mean it's better to take on MORE debt whilst keeping savings.

A mortgage is to buy an asset. One that is likely to increase in value over time and provide imputed rent, ie the value of a place to live. (That said debt averse people like me will make regular overpayments, looking forward t the day when it is paid off.)

A student loan can also provide value, if it buys you an education that allows you to enjoy a better future standard of living. However the terms, as evidenced by this thread, provide disincentives to earning. If you don't earn, you don't repay. If you expect your education to allow you to earn well, and can avoid borrowing, there are good reasons to do so.

A mortgage is to buy an asset. One that is likely to increase in value over time and provide imputed rent, ie the value of a place to live. (That said debt averse people like me will make regular overpayments, looking forward t the day when it is paid off.)

That's what I more or less said earlier. But it's also debt. A good debt, providing you can make the repayments, but debt all the same and one worth taking on in the case of the OP's daughter with a chunky deposit, which of course will help her get a good deal.

It is not true that the interest is set at or below inflation BTW.

This was true 20 years ago when it was the base rate.

They now charge RPI, which is the highest interest calculation and will be higher than CPI / base rate etc.

It looks more like a commercial now in interest terms.

They actually had to cap the interest at something like 8.3% for the last few years because it would otherwise have been into double digits.

Any chance she will move overseas? I know three people who did that and have not paid back a single penny of their loans

No, the daughter doesn't have the money for both.

I think buying a property at 22 or whatever isn’t always the best long term idea. Hear me out. I think they need to be able to travel for work and be flexible until they are on a steady path with work and relationships. Being tied to one town could prevent them taking positive risks.

Yes you can rent a place out but you get taxed and have to be a good landlord.

Just another view of the idea is to save all of that 27k

DD has bought precisely because, as a junior doctor, she will be forced to move for training and jobs. Following the expansion of medical school places, there is only one specialist training place for every four doctors whilst Physician Associates have soaked up a lot of the available locum jobs, so young doctors face having to move for work and training until they are well into their 30s.

Having a property gives a foothold in the housing market. So far more secure than savings/investment which may or may not track the housing market. And this board is evidence that there is a real demand for well maintained rental property.

Fair enough Needmoresleep - a doctor will feel more secure in their career path than some so that makes sense for her

I am not sure if OP has said which uni. It’s also worth remembering that the majority of law grads do not become solicitors. They don’t end up being qualified. So planning on high earnings might not be the best plan. Of course if the DD is heading to Oxbridge the stats are different. So uni matters.

Crystal ball gazing isn’t an exact science. DCs can change their minds on careers. Lawyers come from other degrees too so law degree holders are not the only hats in the ring. The fact is that high earners are ok under plan 5. It’s lower earners who are not. So a city lawyer will pay the loan off quickly. Others won’t. So I’d start researching salaries and look at best and worst scenario.

is this correct? It says you have to pay even if you move overseas

I don't get it when people,e say invest, because I have some savings in an account and some 8n Estes and the returns are pretty meagre. Am I doing it wrong? Anyway, I decided to pay upfront, year by year for my DC

NB the "minimum maintenance loan" amount is given to wealthier students on the assumption that parents/family will top it up to a reasonable amount to actually live on.

Your DC should seriously assess what the probabilities are of having a reasonably well-paid career.

If she takes the student loan and invests the £50,000 (ish - a guess based on what 3 years would cost) in high yield investments she could have an annual income of c£3k though she'd need to re-invest at least £1.5k per year to ensure the income increased with inflation.

She'd need to be earning about £42,000pa before the additional payments due to the student loan company started being more than the £1.5k from investments.

If she's going to be high-flying in her career she will definitely be better off paying upfront.

If she's likely to be mainly doing low-profile bread-and-butter law work and may go part time to raise a family she's better off taking the loan.

However it would be foolish to "wait and see" - if you take the loan, interest starts being added from the day you get the money. If she waits till she's a few years into her career before deciding she will probably find that the interest added means she could no longer afford to pay it off anyway.

The only paying until you're earning 25k is a bit of a trap. Because while you're not paying at the start of your career the interest is piling up. So if like many people you only start earning reasonable wages in mid life, you're paying a big chunk every month at the same time as supporting a family and the interest has made the debt so big you'll never be free of it.

I'm a single parent to teenagers, earning between 40-50k. It's not a lot of money to support 4 people and I don't qualify for any benefits other than child benefit for the youngest. If I had a student loan, I'd be paying up to 200 in repayments each month. I would really miss that money.

I was paying about £18kj school fees so continuing that pain for the university years was not too bad therefore my children have no student loans. I don't really mind if that was a silly decision financially as my own parents made up my minimum tiny grant to full and I just wanted my children to graduate in the same way. Also 4 of the 5 children are London solicitors (as am I) and I knew some of them might earn a fair bit so it seemed to make financial sense too (I have also helped each one buy a first property too so that was not either or).

However those in families of low earners or who think £30k a year is doing very well or from a family where the cultural background is women marry men who then earn most of the money whilst the woman has babies at home then I can see why taking the loan would make sense.

My gut instinct is that she should just pay the fees but I am concerned that it might be more financially astute to take the loan to pay for university and put the cash into a savings account.

DN is in his second year and after one year of tuition loan plus minimum maintenance loan found he had accrued over £800 in interest already by the end of the third term.

She doesn't have enough to pay for university plus a house deposit but we would hopefully be in a position to help with a house deposit and she is likely to be a fairly high earner (going to a top ten university) and has very good A level grades in hand.

With the house deposit, DD decided that as soon as she was earning she would save what she would have otherwise paid in loan repayments.

As it turned out, with really long hours, even with a low hourly wage, she was able to save more, and did not have much time to spend so it started accumulating quickly. And once you have bought a property you can have a lodger whose rent might cover a good part of the mortgage.

Another option. DD shared with friend at University who had used an inheritance to buy a property. Prices went up a lot so he increased his capital significantly, and had his lodger income. Student mortgages are available, but this is a real responsibility of an 18 year old.

@NoSpend19 that was my gut instinct in our case. Now DC1 has just graduated debt free and is able to start saving for a house which in due course he can add to whatever we will be able to help him with.

Very hard to know now if it is the right decision financially but you sound like you as family are making an informed decision. Important your DD is happy and understands the figures so she will not have regrets later on.

For us like several other posters above, certainty and being debt free was an important factor. I appreciate this is a hugely privileged position to be in. Very few families are are lucky enough to have this dilemma.

@NoSpend19 if she spends the money she has now on the fees and living costs and then puts what she would have paid in student loan repayments into a LISA she will probably have a decent size house deposit by the time she is 30 (and it's probably best to rent till about 30 anyway as you don't really know what you want till then. Given the details you've added it looks like she's on the high earnings trajectory and will be better off this way.

If she doesn't spend the money on fees then putting it in an ordinary savings account would be very foolish. She'd need to invest it in a way that gets an interest rate significantly higher than inflation or she is just throwing the money away.

Definitely take the loan and use savings for house deposit.

my brother took out the loan as he also thought it's the cheapest loan he'd ever get, but since he started being a high earner straight out of uni, he really hated having to make chunky monthly repayments. I wouldn't take it out unless it was necessary

But you have several years of cumulative interest and have no idea when you might be in a position to buy or indeed where you might be.

Unless you are an investment whizz, the idea of borrowing too fund saving sounds risky.