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.

DD was a 2023 starter, and the terms changed for the worse that year.
I started looking into it all, and of course read through all the MSE/ML information, which having thought about it, I don't agree with at all, and find it incomprehensible why people quote ML/MSE as some expert authority on the subject. The maths as laid out on a simple spreadsheet, based on various scenarios and salary expectations is the same whether you call it a 'loan' or a 'tax'. My conclusion was, and I believe it is still valid - No, don't take out the student loans if you don't need to.

Completely agree with @Daysnconfuddled if I could avoid my DC taking on a student loan I would. It’s a 40 year mental toll, it’s often quoted that you have to be a high earner to pay it all back. Reality is that middle income earners will be paying back significantly more than they borrowed.

If the government announced tomorrow that they were increasing income tax by 9% for all workers on income greater than 25k there would be complete outrage, but as this is positioned as a graduate tax it’s just accepted.

For many it will impact what they can borrow, what they can save for day to day emergencies, how much they can pay into pensions.

Just seen this popped back up. We’ve decided not to take the loan. It makes absolutely no sense to take it if you won’t need it. I’ve spent lots of time looking at the maths if it

@WhyIhatebaylissandharding and @Daysnconfuddled Glad it's not just me who doesn’t agree with the maths in ML’s blogs. Of course most people don’t have a choice and the loan is the only option to fund uni but for those fortunate enough to have a choice then I’m pleased we decided to fund our DC. This is a real privilege that most families don’t have - in effect reducing their income tax by 9% above £25K.

You won’t pay for 40 years if you don’t work for 40 years or if you work part time and earn below the threshold. Obviously bog standard kids won’t have parents with £50,000 lying around.

That is quite a mental glass ceiling to put on yourself if you don’t have to.

I also don’t agree with the maths. It’s also about a mindset to money.

Dd was in this position. We kept her inheritance in the bank and she got the loan. The cash can be used for a house deposit. We’ve moved the cash around to maximise interest rates.

IIRC, on the current student loan plan, the interest charged from day 1 of taking out the loan is RPI+3%.Current RPI is 3.4%. Highest paying savings accounts at the moment is about 4.8%, that's before tax if it isn't in an ISA.
For a house deposit for example, that would make sense, in that you would effectively be using the student loan to fund the cash required upfront, which might otherwise take years to save. And if you are happy to accept that you are paying interest to do this, then that makes sense. But it is not the case that you could earn more interest in a savings account than the interest being charged.

The most recent loan Plan 5, only charges interest at the same rate as RPI. This year it is 4.3%. You can get better rates of return in a standard savings account so it makes sense to take out the loan and hold onto the money.

We can afford to pay for dd but got her to take out the loans as if she fails or drops out and never earns up to the threshold she won't have to pay it back . If she does we will pay it at that point .

We have got the interest on our money until that time .

We have to sub her maintenance anyway because of household salary so it costs us for that and her living / food costs .

Martin Lewis recommended this on tv when dd was around 10 and it stuck with me

@Tearsofthemushroom thanks , I stand corrected.

The previous loan agreement was terrible!

@Tearsofthemushroom Please let me know which savings accounts, other than a tax free isa, pay more than 4.5%? With the latest bank rate cut, most are lower that I can see.

There’s always a view that dc going to uni will earn a lot more than others. This is no longer true for very many dc and many do end up working part time for years or take career breaks. I would certainly weigh up all the figures but no one knows whet future earnings of dc might be except for nhs employees and teachers. Other careers are far less prescriptive and dc aren’t guaranteed to get them.

Money Savings Expert lists several above this rate. Plum ISA 5.17%, Monument Bank 5.01%. There are lots of options around 4.8%. You could gift your DC the money for them to put in an ISA if yours is full.
Even if rates were slightly lower I think that the added flexibility in case life doesn’t pan out the way you expect it to is invaluable.

Just looked on MSE and there’s quite a few at 4.7 and 4.85%. Some I haven’t heard of like Atom and Plum but Leeds building society is 4.55%. I’ve got a savings account/bond with Barclays which is paying 5.5% but that’s closed to new applicants now.

Pay the fees. I don’t trust the government one bit, they could ramp up the interest payments whenever they want.

"It makes absolutely no sense to take it if you won’t need it."

I wonder if this language is what is at the heart of the debate.

For those who have enough to pay for uni and help with a house deposit, I can see it makes sense. We are in the situation where it's either/or. I am interested in the maths, but there's also a big intangible value in the liquidity, having the money as cash for a house deposit and therefore getting onto the housing ladder potentially many years earlier. It could even make the difference in allowing them to buy before having kids rather than after, which helps so much financially. You can probably tell I'm no economist, and I am interested to be corrected because I want to help my daughter make the right decision. I am absolutely a big believer in a spreadsheet, but I also think this one is tricky because of the tradeoffs. Total paid on the uni fees is not the only objective function here if by paying upfront they then end up paying rent instead of mortgage for a few more years, or buy a small flat rather than a 3 bed house and have the extra costs of moving, paying stamp duty, decorating twice. Buying a house was huge for us in starting to control our expenditure and improve our living standards. We pay less on our mortgage for a 4 bed than the rent on a small 2 bed flat round here. I want DD to have that sense of security when she is ready for it rather than saving up for 10 years paying rent when she had the money for a deposit, but spent it.

Tell me where there are interest rates that beat inflation.... Because I can't find them. So am paying as we go along....it's not as if you do it all at once. I pay monthly.

Quick Google says the Plum Cash Isa pays 5.18%. Current RPI is 3.4% according to www. Plan 5 interest as per pp is 4.3%.

Sure I can put a chunk in an ISA. That rate goes down to 3.59 after 12 months.... Like they all do, so really not a great investment compared to shaking off future debt

Sorry...3.79. still not great....

And then you move it to a different ISA, it's not hard to do transfers and is the only way of maximising your investment.

Sorry to be obstreperous, but transferring in with Plum I is also just 3.79, so I really am not convinced this outdoes paying upfront.