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.

Also if you are reasonably well off I don't even think a 1% difference justifies all the hassle of taking on a loan particularly as loan rules/rates can change at the drop of a Governmental hat.

I think “reasonably well off” doesn’t cut it though. Paying £30,000 fees minimum and £12,000 pa or more living expenses as well as a house deposit is not “reasonably well off”. In London you need the £65,000 for the deposit. Elsewhere in a cheap housing market, you don’t but could buy better. Are there huge numbers of student parents with £100,000 plus available for both? Not sure there are.

Our DDs borrowed but we had made provision for them to have large house deposits. One DD has paid hers off the other earns way less and hasn’t. Many young people find deposits are very difficult to save for. A very good job is needed and we know vast numbers of grads don’t get them. So if parents have covered all uni expenses and fees and have nothing left to give, what then? So it’s not just maths. It’s job expectations, where you live and even how many dc you have and family wealth.

Many wealthy people on this thread can do both easily but for those where it’s either/or there needs to be a crystal ball!

Sorry, but if you drop out or fail, you still have to pay back your student loans.
https://uniacco.com/blog/what-happens-to-my-student-loan-if-i-drop-out-from-the-uk

It’s not a graduate tax in any sense at all, you can thank Martin Lewis for the deceiving catchy phrase.

@kaos2 actually say “if she fails or drops out and never earns up to the threshold she won't have to pay it back” which is correct.

Sorry, I misread that as another or.

Editing, besides minimum wage is quickly catching up to the threshold, which is lower for the current plan loans at £25k than the prior plan one of £28k

The new plan threshold isn’t set to increase with inflation, but as and when the Gov sees fit.

Here

Ah your screen shot cut off before Plan 5 which is the plan all undergraduate students are on since Sept 2023.

The Plan 5 loans that will start to be paid back starting in June 2026 have a repayment threshold of £25k.

Minimum wage goes up to £12.21 in April 2025, times 2,080hrs a year for full time work = £25,396

It will probably go up again in April 2026.

The student loans T&Cs changed in 2023. How does it work? For example, if you have to take out 4 year loans, starting September 2021, do you have 2 years of student loans under Plan 4 (2021, 2022) and then 2 years of loans under Plan 5? Or all 4 years are under Plan 4?

Is the Plan the loan comes under determined year by year, or purely depends on when you start the degree?

It's her inheritance to spend how she wants to spend it so all you can do OP is make suggestions that she is free to ignore or listen to as she wishes.

Perfectly aware of that but we are discussing this together. Anyway she is not taking the loans. The maths simply doesn’t work when you factor in low interest rates on saving plus tax plus inflation

For most young people who do graduate, it’s a tax on earnings over a determined threshold. You can play around with that notion but it’s a fact. No one is forced to pay back every 1p unless they earn enough to do so. Therefore it’s not a loan in the accepted sense of financial planning.

The new plan is aimed at far more paying back the loan and that is to protect the general taxpayer and future taxpayers due to our high borrowing. Grads still mostly earn more than non grads but some don’t. What your young person studies and where makes a huge difference. How rich you are makes a huge difference. Job aspiration makes a huge difference. Some young people will always be the highest earners and others won’t so what matters overall is value for money. If parents have little money to give, this matters most. Too many don’t realise it.

Quote No one is forced to pay back every 1p unless they earn enough to do so.
Unquote

But you are forced to pay way more than what you borrowed through tax deductions. The only way it is not like a loan is no bailiffs will turn up at your door step. And really, no one is forced to take out a student loan either.

I am a teacher. When I started teaching 30 years ago I earnt 12k. Now 30 years on I earn 48k (4x my original wage)

My DC has just graduated and is earning 33k. In 30 years time if they earn 4x the amount it will be 132k a year. 9% of 132k is a heck of a repayment each month.

At the moment their loan is going up a lot quicker than the repayments. Compound interest is going to be the killer.

Albert Einstein is often credited with saying, "Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it".

Your DC won’t be paying 9% of that future salary @Cranmer just like they won’t be paying 9% of their current £33K salary. They pay 9% above the threshold.

But I take your point about the compound
interest being the killer. It’s fabulous when you’ve got £50K ticking over in savings for years, but not so great when you have £50K debt that is only gradually being chipped away at…very gradually.

The debt often doesn’t get chipped away at, the loan can easily grow faster than repayments to such an extent that students will be paying many many times what they borrowed until they are in their sixties. A lot of the Martin Lewis advice is about the older loans that expired after 30 years, plan 5 goes on for 40 years.

The whole student loan system is also encouraging a brain drain as many know the government or SLC doesn’t pursue student loans abroad so people escape them by leaving the country for good. They might get a letter and reminder they ‘should’ pay but there is no enforcement and the taxpayer ends up the loser as does the economy losing a bright young person.

But the threshold is now roughly minimum wage.

@westisbest1982 Ok, 9% of 105k (if on plan 2, with 9% of anything over 27k) is still a heck of a repayment each year. Worse still if you are on plan 5 paying it back over 40 years.

yes, but if you earn for example £27k paying 9% on the £2k over the threshold is £15 a month. All the time the typical loan is compounding interest greater than what is being paid off. By time they are earning more they are likely to be stuck in paying 9 % of quite large sums off.

@PettsWoodParadise That should change. In effect it’s fraud. Also if we don’t hsve loans we don’t have 37% going to uni at 18. I don’t think we should have that percentage but those working in the unis do. It’s their jobs and they care about them. Most unis would like much higher fees. Would you prefer USA style fees? The taxpayer won’t pay and this was the obvious position in the 1990s. A growth in student numbers has to be paid for and at the moment it’s those who still benefit from grad wages. Others do mostly earn less.

If students don’t want a loan, obviously don’t go to uni. This upsets those keen on social mobility though. So no win win here. Dc from
less well off backgrounds need the loan. All those people barely managing don’t want to pay more tax for students when they don’t respect a uni education. They would rather find a plumber more readily.

I am not disputing the need for loans I think there is too much glossing over the realities of it and the impact and not enough encouraging of saving for those who can and tax breaks for those who want to put into an account for a child’s future. Low earner parents ot carers might have a scheme of credits into an account aligned to Pupil Premium or similar, I don’t have all the answers, just know that a lot of the scary facts are not widely known for the reason for so many there isn’t an alternative.

@PettsWoodParadise Is it really worth scaring the vast majority though? Whet alternative do they have?

I believe ML is trying to get people from less well off backgrounds to go to uni. If they are all put off (and quite a few don’t aim high) is that what we, as a nation, need? Is uni just for MN dc who have the money for fees and house deposits? I cannot think what else we could do except encourage dc to aim high and get value for money. Then the payments are not so lengthy or onerous. Some dc might inherit enough to pay off loans but the sums are quite complex. Some dc inherit nothing and cannot save for a house even though they have a degree. Should they not go to uni because the loans are too stressful? I’m not sure this is acceptable either.

The answer might be in cutting down on degree courses and increasing employer sponsored courses. That might be a better way of getting value for money for everyone. But unis won’t like it!

Loans are undoubtably necessary for people who would like to go to university and families cannot fund.

However the OP's question is specifically on whether to take the loan if not really necessary. In these specific circumstances the YP will study law and likely to exceed the payment threshold fast, going into high earnings at some point and eventually repaying the loan AND significant accrued interest. In these specific circumstances I think best to not take the student loan.

The majority on MNs are of the opposite opinion that the loan is always a good idea and should not even be looked upon as a loan, more as a small tax on low earnings. The expectation is that the loan and interest will not be repaid and will eventually be written off, after 40 years. While this may be the case for a large number of students, higher earners will end up repaying a very large amount of interest on top of the loan. Ease consider this.

I managed not to take out the loan (fees were lower then and I worked and had a scholarship). I have never regretted this decision; it makes quite a difference to your pay packet to have another 9% going out.

She might want to be a SAHP or work part time in the future, yes, but I work part time and am still over what would have been my loan repayment threshold. And I suspect most people who've done law would earn more than me.

Should have said - I do know it's 9% on the amount over the threshold, not a blanket 9%! Still can make a considerable impact.

@TravellingLightToday A degree in law does not mean high earnings! There is another thread going where law grads are struggling to get law jobs. From top 10 RG unis. This is partly because law firms train existing employees. The lawyers explain why this is happening but essentially firms try before they buy. They don’t “buy” everyone. The high paying jobs are like hens teeth. Plus law grads have to compete with other grads who have done the GDL and are also very bright and motivated. My DD is a barrister and for many law doesn’t mean high earnings. Fortunately for her it does but for others it’s a real slog. So anyone who is not Oxbridge or brilliant at application tests can really struggle as there is a huge over supply.