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.

@Xenia The DD doesn’t want London. She wants regional law and that’s a mixed bag regarding income. I doubt £100,000.

Shame on them.

Nothing to boast about

You won’t necessarily save enough to be able to afford a house or house deposit just because you get a student loan - you might just be borrowing money to make your future finances more complicated, and the money you “save” by getting the loan might end up being pissed up the wall quite quickly after you graduate, or simply spent on renting somewhere a bit nicer for a while than you would otherwise have been able to afford. At least if you don’t have student loan debt, you are not at the mercy of student loan goalposts being moved and will have a better handle on how much money from your salary you can save for an actual house deposit without worrying about what the latest level of income is that government has decided to start taking a higher percentage of your pay away from you in order to pay back loan interest.

You will have house prices and mortgage rates to worry about though. It’s a moving picture!!

Well exactly - why complicate it still further if you don’t have to?! It’s not as if it makes it more predictable to have multiple types of debt.

House price variation is not debt any more than rental prices are.Affording both is the bigger issue. As is saving for a deposit. Although if grandchildren get £50,000 I assume the OP has considerably more.

It's like using inheritance to pay your tax. It's just a study tax. Would you do that?

It isn’t a study tax at all. It’s more like taking a loan to pay private school fees.

Mortgages are debt. Student loans are debt. Student loans may be the best sort of debt you can have, but they are debts. The alternative is to view the repayments as more like a graduate tax for higher earners (although government can move the goalposts, so not necessarily higher, but at the moment just graduates…) which you can pay off now to avoid in the future. If you can’t afford to pay to avoid it, then don’t, but also don’t pretend paying back more than you borrowed over time for having something you want for yourself, now, isn’t paying back a debt. Student loans are a debt you are sharing with taxpayers/other taxpayers, hence the good terms, breaks from repayments and eventual write offs, and the ability to wonder what will be the better deal for you, to borrow or not to borrow (ie how can you minimise your own pain and transfer as much of the cost/debt as possible to the UK as a whole). If you dislike personal debt, there is no point pretending a student loan is not a debt, though.

Can someone explain the investment of the lump sum argument?
I have the amount it costs in fees and maintenance in the highest interest savings account I could find and it gets me under 2000 quid interest a year which I have to pay higher rate tax interest in and which is anyway eroded by inflation. My Stocks and Shares have fallen too. Am I doing it wrong?

And LISA is restricted to 9000 a year. I guess DC could have savings account but can't find anything above 3.7 interest.

Your dcs wouldn't be paying higher rate tax on it though would they?

True, but still fairly pathetic growth.

I just prefer to pay it as they go....rather than dealing with low rate savings returns.

Ons year ISAa are at best 4.5%. Look at best ISA deals on MSE. 5% is not achievable right now and if BofE reduce interest rates the over 4% rates might go. Two year ISAa are slightly lower. There is £20,000 limit so 2 or 3 of you need to invest @felissamy

Student loans are a “debt” but the only debt you will ever have where the bailiffs won’t arrive if you don’t pay it off!

felissamy I agree. even when my first child went (fees £1k only plus rent so still expensive but not as bad as over 9.5k of fees a year) there were some richer parents saying take the loan and stick it in an ISA for the 18 year old. My view then was that what for me are fairly small sums in interest (I think they are small may be because I earn fairly well and appreciate not everyone would agree) is not worth it for the hassle of student loan forms, mistakes, resale of the loan book by the state to Erudio, changing the terms left right and centre because the contract terms allow what was really worth the hassle . Eg if a typical student has 50k of loans by the end the interest on that being a lower capital sum in year 1 and year 2 is not really worth the effort of all that setting up of the ISA, getting the loan and then paying it back when you graduate from the sum the parent put into an isa for you (and the child has to be 18 or over otherwise sums given are treated as the parents' for tax purposes - I was still 17 when i went to university).

So I would say if you can afford it just pay the fees and rent. I DID pay the fees direct to the university however rather than hand to the adult child to pay but also had a weekly allowance for them so they could not over spend it ever (and I paid the rent separately)

How did they learn to budget if they were never trusted with anything larger than a weekly allowance as students? Are they any good at standing on their own feet now? Did they find their own training contracts? Live on their own after university? Genuinely interested as we are in a privileged financial position and they have always known there is family money but we are trying to balance being able to just pay for everything with making them responsible for their own lives and finances.

DD had a similar option OP thanks to saving since she was a baby. For those who say

My takeaway from the MSE links above is that interest is set at or even below inflation so it's not really bank-loan type interest

Incorrect, interest is just under 8%, it will always be a few percentage points above bank base rates.

I worked out for DD loan for three years would mean £6k interest by last day of her degree course.

I just hate the idea of ‘they will never earn enough to pay it back’ so on that basis they take the loan. Nope, not going to put that label around my DD and will assume the best of her.

As a manager I even met a student begging me not to give them a pay rise as they would then have to start to pay back their loan. I explained to them it was only the portion above the threshold but they still resisted. There is a lot of mis-information about student loans.

We gave DD the option to have the money or take the loan, she chose to pay her Uni fees. As it is her money she budgets really well, works during holidays etc. her friends who have loans mostly (but not all of course) don’t seem to see any need to budget as it is all debt and so hard to visualise.

Yes. The debt is written off after 30 years if you don’t pay it back

Under 2023 loans it 40 years. The goalposts have moved from a lot of the old advice.

Oh dear. The younger generation are having such a rough ride.

I agree, and as a side note, paying tuition fees and accommodation for a Uni student is excluded from the estate for IHT calculations if the payer dies within the 7yr window as it is considered a gift for education.

Something to consider if parents are older or grandparents are contributing.

A lump sum gift for a future house deposit/whatever would be subject to the gift limit and could attract IHT depending on the total value of the estate.

We did this. Renting out my DMs home when she went into sheltered housing, and she then gifted DD her education costs. From memory I think it was important that these gifts started prior to her losing capacity, but I am not sure. Also whether these gifts needed to be out of surplus income. Certainly you can't make gifts if there is any risk that this would leave the person without sufficient funds to pay for their own care.

Usually on threads like these there is a marked difference of opinion between Londoners and non-Londoners.

The deposit needed in London is so high that saving for a deposit rather than paying fees probably won't work. A common approach is for London bred DC to live at home, earning a London wage and saving on rent, until their salary has risen enough and they have saved enough. Perhaps with partner who has also managed to tuck something away. All whilst hoping the parents will retire at the right time, selling the family home and releasing money to help with a deposit. Marginal income matters, so not having to pay student loans helps.

DD lives outside London in a place where you can still buy a two up two down in a reasonable area for £120,000. She bought in her first year of working and though we gave her a bit of help that allowed her to buy something bigger with a garden, she could have managed without. Her brother lives in a far more expensive City where a similar Victorian terrace would be £450,000. They probably earn about the same, but he would need a lot of help from us in order to get a mortgage. House buying is probably some way off.

Its fine talking about Martinmoneyman and saving for deposits You might win, you might lose. You don't know what the DC will be doing and where they will be living. Far less complicated to pay up front if you can.

Botanical the older 3 children have been fine with being completely independent despite a weekly allowance at university. Two are married with children and the third is not yet married but lives in Oxfordshire completely independently other than his help to buy his first property.

The younger 2 still live at home rent free but buy their own food. I don't pay for much for them. They pay for their own car, phones, do their own cooking and shopping. I did consider making one payment per term which I think my father did with his covenanted money to me in the 1980s which could in those days be set against tax, for my rent. I was just content to pay weekly and it does not seem to have stopped them living responsible adult lives.

I have not set a time limit on when the younger two leave home and I do pay the 100% council tax (lose my 25% single person discount) because they live at home but don't mind paying that. I sometimes joke that if they stay too long they will be my night and day dementia carer changing my adult nappies but we have not quite come to that as yet.

My dd has taken full loans & using them to save for house deposit. We did a lot of sums. This made the most sense.