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.

The ML/MSE article was very helpful. My DD is going to uni in 2025 and I'm bamboozled by how I'm supposed to help finance it. I know there's some bias and political guff in there though.

DD has savings that we built up over her lifetime so we aren't under prepared in that regard, but in no way is it enough to keep her for three years, maybe one at most. Also my exH & I obvs no longer live together, and I earn significantly more han he does, and DD lives predominantly with me (though that might change) so I assume the maintenance loan will be based on my income and not her Dad's? So she might get less than if she lived with her father? Or have I got that wrong? Will it be based on both of our incomes regardless of who she lives with. DD plans to get part time work as well during her studies.

She has no plans to not live with a parent because student accommodation is expensive. She's seen a course she wants to do in the city she lives in, so, bonus all round. (London)

Loan calculations are based on the parent you live with if the parents are separated. Although it is the household income of the parent you live with, so that includes the income of any new partner.

a) interest is currently set at RPI (which is the retail price index) and tends to be a highest inflation index we measure. It isn’t likely it will ever be ‘below inflation’ for Plan 5. It starts from the day you take out the student loan and the interest is compounded.

b) correct

c) no, over half of graduates will pay their loans in full, including interest according to the DfE fact check on plan 5 compared to the 20% under plan 4.

A larger number than 50% will pay back what they borrowed, although not the loan in full (which is principle borrowed plus interest accrued).

d) there is a lot to lose by going for it as Plan 5 has middle earners ending up repaying far more on their student loans than high earners or low earners. The equality impact statement by DfE said that women and minorities will be disproportionally negatively affected by this Plan 5.

“And despite the DfE saying the new system will be “fairer” for students, its own equality assessment of the new plan found that female graduates will indeed be negatively impacted due to the increased loan term and “their typically lower-than-average lifetime earnings”.
Borrowers of a white or black ethnicity from disadvantaged backgrounds, or who live in the North, Midlands or South West, are also “likely to see some negative impact with increased lifetime repayments under the reforms”, as well as young borrowers.
The DfE also told FactCheck the reforms will mean “more than half of borrowers will repay their loans in full, compared to the current rate of 20 per cent”.

https://www.channel4.com/news/factcheck/factcheck-how-much-more-will-new-students-pay-on-loan-repayments-and-will-it-be-fairer

This calculator can help you estimate the amount your DD would end up repaying
https://studentfinancecalculator.co.uk

the loan is only increasing by inflation (albeit a slightly higher calculation) so the actual value of the loan won’t be increasing if they are not paying it off. It makes sense to me to use the student loan and decide what to do after graduation. Assuming that the savings are in a decent savings account they won’t be worse off and you will have a better idea of which way to jump.

They can’t change the terms on a mortgage. :( and you can always sell your home to clear the mortgage, unlike a degree you can’t sell it to clear your student loan. Even if you drop out of Uni with no degree, you still have to pay your student loan if you earn slightly more than the new minimum wage.

Thanks for this, all useful.
Though saying over half will pay off in full is the same as saying almost half won't, no? And I believe interest was capped below RPI when inflation went v high.
But no reason that should ever happen again.
V interesting impact-assessment summary of who is likely to end up paying more . .

I think this is particularly deceptive piece of Martin Lewis advice.

Of course the value of the loan is going up. The fact the interest rate currently charged is RPI doesn’t change that.

Even in real terms the value of the loan is going up because the cost of education has not been inflating in line with RPI but at a much much lower rate- it’s literally been increasing at 0% from 2012-2024 as tuition fees were frozen. Even the recent increase is only 3%.

Besides, what savings account is going to match RPI? None.

Although the key to understand is that over half “paying off in full” means everything borrowed plus all the interest.

The vast majority of students will be paying off all they borrowed and then some interest. Almost all will be paying off what they borrowed. Very few will pay back less.

The worst change in Plan 5 is that middle earners will now pay back more money in total than low and high earners.

I would take the loan, see where she is at the end of 3 years and then she can decide whether to pay it down or use the money instead for a house deposit. There are salary calculators that show how much they will pay on each salary amount. Ds1 is on Payment Plan 2 I believe, his debt is around £42k ish, he graduated this year and is on a graduate salary so above the threshold for paying it back.

He is saving for a house deposit whilst living at home rent free. Because he worked over summers he has £20k saved already. £15k of this is in his LISA, so he paid in £4k and the government topped it by £1k each time. If we could have afforded to give him £45k for a house deposit he would have £65k already and it is only November. We would have done that rather than cover his uni costs. There are lots of threads about people dropping out or failing years. There is no guarantee they will complete the degree.

Ds knows that his mortgage affordability is off his salary, but the more he has as a deposit the more choice this gives him for housing.

I believe interest was capped below RPI when inflation went v high
I thought it was capped at RPI because Plan 4 is RPI +3%?
so yeah, not likely to go below RPI

As someone with a loan from plan 1,
I had 15k left to pay last year and now it’s going up. My payments are £100 a month but the interest is £200. I wouldn’t be taking out the loans unless it’s really needed.

Taking the loan and then paying it off after the 3 years seems crazy as you will have to pay off the interest too.

Without going into the economics of the loan itself, I would encourage her to take the loan for her course and use the inheritance for a house deposit or put in an ISA for now.

I don't wish to sound like a bad omen but from experience with education (health issues in my case), life isn't always plain sailing.

I very much hope it is for your DD. However, simply put, there are no guarantees re future success and a solid chunk of cash now that can guarantee her a house or a start in business or similar would be a really useful asset that she'd be better off (IMO) treating as such, rather than spending now (even on something worthwhile) in anticipation of earning it again.

Spending it on a course for which she has a viable alternative, the loan repayments are manageable and (as of now at least) fluctuate if her salary does and should she be unfortunate work wise, be effectively written off by retirement age, is much more of a risk.

On the calculator I linked, I put in rough estimate of tuition plus minimum maintenance outside London 2025 for three years.
I guessed a modest starting salary of £35k
This is what it showed.

Borrowing around £48k but paying back almost £172k, and loan paid in full at 39.9yrs.

However, if she landed a city job at £85k/yr working as a paralegal…total paid back is only £60k and paid off in 8.9yrs

This is big inequality issue with Plan 5, the graduates most likely to be high earners are paying back a lot less than the middle earner.

It’s clear that the higher the earner, the better value the loan is. This is because they pay it off more quickly. It’s not taking them 40 years so less interest. You cannot assume a top 10 uni for law leads to a high paying job. It might but the regions pay less than London and branch of law will really matter.

I have been mulling this over. We have saved for university and can cover fees and the minimum loan.

We are taking the loan £42k and paying the interest monthly so it doesn't snowball. This means DS will be debt free in 20 years. He then has a decent house deposit leftover. He still pays 9% over the threshold but at peak earning he will have cleared it and can save into his pension.

However, if life takes a turn and it looks like he will be a low earner then we will stop paying interest.

Realise we are lucky to have this option.

Just something to consider - if she ends up with a job that pays a bonus, they will help themselves to a big chunk of that every time she gets paid one as well.

We are very familiar with law as a profession

Thanks for this informative thread. I clearly have some more reading to do.

My not very sophisticated take on it is the answer might be different with each of my children. DC1, planning law, quite switched on, likes to plan ahead, can't imagine settling down in our provincial town. I think it makes sense to take the loans and keep the GPs' legacy towards a house deposit and/or further qualification fees. She can always choose to pay down the loan instead of a house deposit later. I know taking the loan comes with a cost, but it's worth some financial cost to keep her options open now, and decide when she is in her early 20s rather than at 18. I don't think a loan at RPI interest is a bigger spectre to fight than having to save up a massive house deposit from scratch, when you are paying half or more of your income on rent in your early 20s. Happy to be proved wrong and I will look into it more but that is my feeling, for her.

Whereas DC2, very nervous of debt and likely to live at home many more years. It might make more sense for her to use GPs' money towards student fees, and worry about moving out and house deposits if and when she reaches that point. The freedom from debt is maybe more beneficial to her, vs the freedom to buy a home which is more important to DC1.

@Anicecumberlandsausage but as a student living at home she can still get a decent maintenance loan, and use earnings and her own savings to top up. She'd probably be better off than peers living away on min maintenance loan and £5k cash from parents, even if you just keep a roof over her head and don't give her a penny.

@NoSpend19 So presumably DD will walk into a job. Is that what you are saying? No need to worry about strong competition from others? In which case I’d pay the fees if you are lawyers!

No I never said that. Leaving aside very small family firms it’s rare nowadays children of lawyers to walk into a job.

So how do you know how she will fare after uni? Is being familiar an advantage?

No I simply meant I didn’t need lots of commentary on law as a career. This is just about the maths for a likely fairly high earner

It is certainly never an easy calculation as you pay 9% (15% if also post grad loan) of earnings over the threshold. So if your earnings are only ever £500 over the threshold then it is £45 a year so on a £50k loan effectively is 0.1% interest a year in a way in terms of interest. If you are on £150k as an NQ solicitor at a top US firm in London then when if the threshold is about £23k that is 9% of 127k = about £11,430 a year interest/ sum paid which is about 20% of your 50k borrowed.

I suppose even for my children who does not earn very much who is delighted he has no student loan I have saved the state some money so may be that is also a moral good.