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.

What @TravellingLightToday posted is still correct and I agree with it as a diplomatic fair summary. In these specific circumstances, unless the OP's YP going into law is expected to earn below minimum wage (doesn't even have to be a high flying lawyer), it makes sense not to take out the loan.

'Is it worth scaring the vast majority though?'

With the reality of what an additional 9% tax feels like and the maths? If ML/MSE is trying not to scare people off, then they just need to be upfront and transparent about it. However, it seems that a lot of people, even for those who can afford not to, take out the loan 'because MSE/ML says so'. At 18 years old, mosts are only just starting to grasp the meaning and value of money, budgeting and financial independence. Most cannot grasp what an additional 9% tax means in reality until it hits them later, and many wished that they hadn't taken out the loan as evidenced by many posters on this thread looking back in hindsight.

I have several engineering graduates working in my team who are 2 to 4 years into their career for whom the reality is starting to bite as they get their pay rises.

I think you need to think about where she might be after uni as well. Is she likely to be able to live at home and save up for a house deposit? Or is she going to have to rent somewhere and see much of her pay go on that while also struggling to save anything for a deposit? Is there enough money for a deposit that could mean she is able to get on the housing ladder quicker?

My husband, who is in a finance type role, recently undertook training which suggested over 50% of Brits did not understand compound interest. The figure for 18 year olds will be higher.

There is no right or wrong answer. A lot will depend on an individual's propensity to save/spend. I, personally, like to keep things simple. There are too many unknowns so it is simpler not to borrow if you don't have to. Now they have started earning DC are very happy not to have loans to replay. Not least because one undertook 7 years postgrad study and the other took a six year degree course. The compounding would have been awful.

(I also don't like the ideas of my DC having their loans written off, or being incentivised not to earn much. There are a lots of better ways to spend taxpayers' money.)

@Daysnconfuddled Thats not accurate. Most take out a loan because they have to.

We already have very risk averse people staying at the home for uni when they really should go somewhere top 10. Not scaring people with interest rates as opposed to saying you pay according to what you earn is what ML is trying to say. It’s a fair point for most students.

It’s all very well for savvy rich people to crunch the numbers and fork out £60-100,000 but it’s not fair that others are put off. We know this happens and it’s a great shame. No doubt most posting have eyed up the best unis and expect dc to earn loads. Do you actually think a law student studying at the least good uni will have the same outcomes and earnings as an Oxbridge or Bristol grad? It’s unlikely and therefore getting a loan is the only option to level up.

To be honest, I'd take the loan even if I didn't "need" it and then wait a few years to see how the degree works out and job/career etc., and only then pay it off if I forecast I'd be earning enough for long enough to end up paying it off PLUS decades of interest. If, however, my forecast was that I'd be unlikely to be earning enough for the decades concerned, then I'd let it continue, let the interest roll up, in the knowledge, I won't be repaying it anyway, whether because I'd be working part time, mostly under the repayment threshold, or because I didn't like Law and took a lower paying job/career instead, etc. Worth letting interest build up for a few years to give full flexibility, rather than not taking the loan in the first place, using my savings, and end up earning too little that I'd never pay the loan off anyway.

@TizerorFizz I'm trying not to make this personal or emotive. This thread is specifically about the OP's question on the maths of it, on top of the maths, it sounds like the OP is also considering the softer more subjective side of the decision making considering her own personal circumstances and attitudes to debt and risk. But you seem to want to discuss the whole student finance system, and the 'fairness' of it. Whilst that is very noble, and no-one is disagreeing that the student finance option is there (and should be there) if they need it, the tone of 'it's all very well for savvy well off people...' whilst others are put off....it's seems rather condescending to assume that people, rich or poor, can't handle the cold hard facts while factoring in their own circumstances and attitudes to risk and debt.

I actually believe students and parents should weigh everything up and there have been loads of posters who accuse me of posting my views which they think don’t help social mobility. 8 pages in it’s fairly standard to get deviation from the original question when the op has reached a conclusion. It just seems a bit off not to acknowledge the majority who should be encouraged to take the loans because there’s no other way of going to university. I’ll leave it there.

Student loans are taken by two categories of people: those who absolutely have to in order to go to university and the ones who could self-fund but choose not to for various reasons. It could be that they see the money would be best kept for a house deposit, car or investment or they are unsure if the degree will be earning a high enough salary later, as a poster above says.

Many think taking the loan should be the automatic option in the second category. This conversation is about whether that should be the case. I am of the opinion it should not be as there are circumstances, including those of the OP, when it is worth considering the alternative.

It has been suggested further up that the conversation around the facts of student finance should be avoided altogether for fear of scaring off people who absolutely need the loan. IMO these facts should be discussed rather than not, so people act from an informed position.

We are in an ‘either-or’ position in that we can either pay fees or stump up a £30k ish deposit for a home. We’ve decided to go down the deposit route. It’s better for them to have the lump sum when they will actually need it. Otherwise it will likely be tricky for them to get on the housing ladder.

I imagine a lot of people are taking the loan, still unable to raise a sufficient deposit to be able to afford a house (particularly when their disposable income is being reduced by student loan repayments) and are ending up spending the money “saved” by getting a student loan on everyday expenses until the money “saved” runs out, then all they are left with is the 40 years of student loan repayments.

I think the economics of whether or not to take the loan have changed a lot since they were first introduced.

The lowering of the threshold at which you start to repay and the increase in the minimum wage being 2 of them. The mantra of “don’t worry you only start repaying if you earn enough and it gets written off anyway if you don’t” was perhaps valid in the early years, but this is still what a lot of students and their parents think and I don’t think it’s as simple as that anymore more.

It’s all very well for savvy rich people to crunch the numbers and fork out £60-100,000

This is interesting. Could it be that some people are rich because they are savvy?

Though we did not make a big thing of it, DC knew that us paying was not straightforward. We were having to be frugal so they were as well. Lots of small things. Spending time ensuring they got the best utility bills, cleaning the rental flat so they got a full deposit back, buying off peak tickets on the train/coach, Coffee flask/packed lunch, and meals made from scratch. It was fine. Their friends tended to be similar. For example one friend came from N Ireland where there are no student loans to study in England and she was being financed by working and by the extended family.

DD was often shocked at how much some students, from not particularly affluent backgrounds, were spending. Loans are not free money. The less you borrow the less you repay. If you are careful you might be able to ask your parents to save part of the parental contribution. And the habit of being careful, of checking fares and bills, thinking twice before ordering a takeout or a taxi, will stay with you.

Then the big decision, assuming your live near a large conurbation with a good universities, is whether to borrow lots of money that you may spend a life-time repaying, or live at home. (Or - a preferred London alternative - first year in halls, the rest at home.)

If you are money savvy, you are likely to be richer - even if it is rich in the sense of being able to afford a chosen lifestyle.

I agree with this. It's changed multiple times since student loans were a thing, I noticed there was (and still is) a lot of confusion and incorrect information or out of date advice when I was looking back in Feb2023, that's why I had RPI+3% as interest rate stuck in my head, and that was at the height of CoL and RPI was in the double digits. You have to be very careful as it's potentially not what you think it is.

One friend said to me that it was a no brainer to get the loan on the basis that:

• its completely free money
• you will probably never pay it all back
• you only pay back the same amount no matter how much you borrow

All of which are facts which are partially true

• its free money - well everyone can access it but compounding interest from day one means its certainly not free
• you will probably never pay it all back - out of date fact and yes it will be true in some cases but generally now this is only because the compounding interest means the debt gets bigger and bigger and bigger faster than you pay it off, particularly now that it lasts for 40 years (in fact more than 40 since its 40 years from the date at which you first trigger repayment which might actually be 4+ years after you first start accruing the interest)
• this is only about the rate of pay and not the amount. Yes everyone pays 9% of their salary over the threshold but the length of time this goes on varies dramatically and then as a result see compounding effect above.

I think so many people simply don't think it through properly they just remember hearing something about it a few years ago and think it still holds true.

DD is comfortable with her decision now we've looked at it properly. DN owed over £800 more than she'd borrowed on her minimum loan by the final day of her first year.

I think that most people do need to take the loan. Most parents can’t afford to fully fund their kids through uni.

For those who could fund EITHER uni or a house deposit, it might well be better to fund a house deposit and take the loan.

For those uncertain it could be best to take the loan, with a view to paying it off quickly before too much interest accumulates, IF the child gets a high/medium oaying job (actually the latter is where the most interest will be paid over the course of the career)

Those who can afford to pay the student costs AND a house deposit are probably wise to pay for both and avoid the loan. The substantial interest can be avoided. But if course few are in this position to pay both.

Some of the decision making for the well-off isn’t just about weighing the chances of not paying off the full loan vs paying the fees as parents….its about peace of mind for themselves and their kids moving forward, that this isn’t hanging over them and a burden avoided. Many are prepared to pay the fees and maintenance for this, even if they think their kid might not be a big earner in the end. Of course this is a luxury to be able to think like this. I do see it as a bit akin to parents being willing to pay private school fees without knowing if their child will get a better outcome as a result….its is about the journey as much as the outcome. And again, it’s a luxury to be in the position to think like that, rather than purely in terms of hard cold numbers and inputs and outcomes.

One thing I think is an error is to decide that if you’re going to take any loan, you might as well take all of it. Whilst it’s true that any loan will result in the same monthly payments by the student once at work, this is too short term a view. A smaller loan, whilst needing the same monthly repayments will be paid off earlier and accrue less interest to be paid off over each month, and overall over time. These are not to be sniffed at. So lots of parents could choose to take the maintenance or fee loan but not the other. It doesn’t have to be all or nothing. Or they could fund the first year and take loans for years 2 and/or3 which reduces the time interest is accumulating, as well as total amount. There are lots of nuanced options.

Most people will take the loans. It’s that or don’t go to uni. Yes, some probably shouldn’t go, but they shouldn’t go because what they will do won’t add value to their careers, rather than not go because of the loan. For those who want to do something that can add value to their career and access a good uni, the loan shouldn’t be an off-putting factor or make them choose to live at home if elsewhere would be better for their career. But it’s easy to say this and not so easy to feel this an 18 year old or a family who have not got uni experience, and it’s difficult to know what careers kids will go into in future. So the difficulty is making choices without full information, and that information just isn’t available about the future. Understandably, the better off feel more able to ‘take the risk’ of the loan and have more confidence that they and their kids will weather whatever follows. Unless the government is willing to pay, loans are the only way for most and are unavoidable.

@WombatChocolate Exactly.

If dc are lower earning, 40 years does make a difference in terms of money paid and their ability to save is compromised too. High earning dc will be able to clear it more quickly, and therefore pay less. Each family is different but I agree with your summary.

Our DDs took the loans but we gave them multiples of their uni costs for a deposit. That means lower loan to value ratios and cheaper mortgages. It’s all a gamble really!

I don’t entirely agree that loans are unavoidable. The UK has a fairly unique set up where the majority of students live away from home when they go to uni. This makes uni a much more expensive option here than other countries and necessitates taking out loans. Without the cost of maintenance loans for all (& there is still a significant cost despite the significant repayments graduates are making), perhaps the govt cld afford to pay for those students who need to live away from home because they don’t have good local options.

Obviously for historical and geographic reasons UK is highly centralised around a few cities which makes us different to more regionalised countries. So of course I understand that you shouldn’t discriminate against people because they don’t happen to live in Manchester or London etc. and courses do vary from institution to institution (but they don’t have to).

However, we don’t subsidise those taking a non university pathway to spend 3 years away from home, however much they might benefit from such a period of independence.

It would need quite a radical shift in culture and expectations.

My brother paid off his student loan and he's only 29, but he got a super high paying job straight out of uni. He didn't like having the significant student loan deductions at all and regretted taking out the loan.

I don't see how graduates would earn below the 25K threshold if that's pretty much minimum wage, unless they plan to be long-term unemployed. I wouldn't saddle my child with huge debt if I could avoid it.

So how could he have paid for his degree if he hadn’t taken the loan?

My parents could have funded it, but they also thought that the terms of the student loan were too tempting to refuse

Aside from the maths & appetite for risk for individual families there are a number of very interesting questions being raised in these posts.

Many of these are steeped in issues of equity both within and between generations as well as the respective contribution to society / economy between those who go to Uni and those who don't.

1. Should the state subsidise university places through loans that aren't paid off when over 50% of the UK don't go to university
2. Should the state fund unis directly and then we have a proper graduate tax that all pay which avoids those rich enough avoiding loans and being in a much better position with regard disposable income - FT has a fascinating article on Bank of M&D this week 3.Equality of access to the best universities when you live in a remote location ie not in commuting distance 4.Subsidising students to live away from home even if they live in commuting distance 5.Encouraging people into HE and social mobility from poorer demographics or those without a custom of accessing Uni 6.Should my child take a loan when I know they may not pay it off and their uni is being subsidised by the state when I can afford to pay the fees and or maintenance

It's all pretty complex and no easy answers but good to have the conversation.

Borrow, yes when I am being particularly irritating I might say I have saved the state a lot of money and made a gift to the poor by funding my children 's university fees, but I am not going to claim the moral high ground on this thread.

For parents - the 20% of children who are in private schools in the sixth form - continuing to pay say £18k a year day school fees into university years ( which is how I regarded it with my private school children) may not be too hard as you are just carrying on paying what you have been paying for years anyway. It is not as if paying those kinds of sums is something new for private school children's parents. It is same old same old.

Paying school fees was a stretch for us, but then relatively easy for us to continue till they finished University. One day we will have that smart holiday or the new car, but overall we gain on-going satisfaction that they are starting adult life without debt, and so have more freedom to choose what they do or where they live. Both are likely to stay within the public sector so unlikely to ever be super-high earners.

I do not really agree savvy equals well off. People inherit money. They don’t all make it themselves. Very bright people can have very average paying work. There are many decent people who do not have .£60,000 plus to hand over to DC. In fact few I know besides us! We chose to give big house deposits and dc took loans. One paid off at 30 having started paid work at 25. She’s possibly savvy but also has well paid work.

Also we know many grads earn below £30,000 pa. Plenty around £25,000. It’s not unusual out of the millions of grads we produce. Depends where you live. As do living costs. Many find it impossible to save even if they get £40,000. If the house deposit is spent, what then?

Many of us don’t live near a decent uni. I’m within 30 miles of two in the bottom 10% and limited courses. Or we have Oxford. Brookes or Uni. No public transport to any of them! It’s ok for city people to stay local but courses and quality are not available everywhere. This might also mean we reduce options for those who should aim high but are scared to do so. Staying local can also harm job opportunities but could be better for the local economy!