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.

I'm 33 so on a slightly different plan , my Dad paid of a big chunk a couple of years ago and now I only have 1k left . Could you maybe see how she gets on and pay it if she starts earning enough?
Student finance currently take just over 300 a month from me and it is taken into account when applying for a morgtage.

I did not say that. I suggested that being money savvy helps you to be better off. If you put your mind to it, you can keep living costs down. Again compound interest. If you spend less than you earn, savings grow. If you spend less at University you leave with less debt.

And yes not everyone lives close to a suitable University, but plenty do. If that is the case there are advantages to living away from home, but they comes with a cost. A cost that needs to be considered.

As for public transport, by 18 DC can be inventive. DDs course involved a number of remote placements. In DDs first year her friend bought a cheap car with the proceeds of her sixth form Saturday job which allowed her to to give lifts to her peers so recoup the running costs. (FWIW and depending on course I would have thought Oxford and Oxford Brookes were both well regarded.)

I have utmost respect for Martin Lewis, but his stand on student loans is where I vehemently disagree with him. He constantly spouts about it not being debt and uses the statistics that the vast majority never pay off their loan, but it's sending a very mixed and wrong message.

People don't pay it off because of the huge interest being added year by year. Most people do actually repay the amount they borrowed, but they just don't get to pay off the interest which can easily be 2 or 3 times the amount originally borrowed. That massively skews the statistics.

It's fine for people going to Uni for a Jolly who are unlikely to repay, either because they take on minimum wage (or just above) jobs, or those who plan to only work part time due to family circumstances, etc where they can earn say £25k just doing one or two days per week. But for the ones who plan for a few decades of even "average" earnings years of say £40-£50k, the interest they'll end up paying is eye watering.

Me and our son set up a spreadsheet showing the effects of the interest and did various break even scenarios at different income levels. "Middle earners" are definitely the hardest hit as they take decades to pay it off, all the while the interest being added, thus lengthening the period of paying off. Higher earners are better as they pay it off quicker so the interest doesn't mount up as much. Obviously lower earners are best as they never pay any of it back.

As usual "middle" earners are screwed - again!

In case you haven't seen this before, here is a very good tool for playing around with the numbers. If you use the "Advanced Options" tab you can play around with lots of variables like RPI, overpayments, salary increase etc. It will give a sense of how wildly total repayment could fluctuate. There are so many "known unknowns"!
https://www.student-loan-calculator.co.uk/

To be fair to Martin Lewis, I think when loans first came in, it was quite possible that someone might never reach the repayment threshold, or pay very little, even with an ok graduate job, and then have it written off in their early 50s. But the threshold hasn't only not kept up with inflation, it's actually reduced and is barely above full time minimum wage. And it won't be written off until your early 60s. So almost all graduates will be paying quite a lot and for a long time. Quite a different situation.

I agree that people make the mistake of thinking their kid will borrow £60k and work on the basis of that figure to be paid off, forgetting compounding interest which means they may well pay more than 3 times that amount back. The debt, if fully paid over time could be £180k, so someone who pays £170k could be said to have ‘not repaid all of their loan’ but people forget they still paid £170k.

If people who could possibly afford to finance some or all considered the difference between £60k and £180k cost of uni, they might re-consider helping fund it if their help could reduce the compound interest. But then again, those figures might also out those who cannot afford uni without taking full loans off going….understandably in some ways.

The figures people need are not just the money borrowed from student loans but the TOTALS that have to be repaid. Of course no-one can give definite figures because everyone’s earnings and points at which they reach different thresholds differ and no-one knows them in advance.

I think that peoples mindsets have not caught up with the new 40 year repayment period. They have vaguely heard in the past that it’s wise to take the loan and not give money to the kids for uni. But I also think an increasing number of 30+ year olds in 10+ years times, who have decent earning middling jobs, small kids in childcare and mortgages might really wish that chunk wasn’t going out every month…..and still wishing it when their own kids are at uni and they struggle to help them because they are still paying their own student loans. Because that’s the reality isn’t it - paying back student loans for 40 years means when you’re in your 50s and into 60s possibly and exactly at the time when people’s own kids will want to be in higher education.

I also think too many people see it as loans for everything or nothing, or look to pay just the minimum parent contribution to get to the full loan but take whatever is available. They don’t crunch the numbers and look at possibilities of taking a smaller loan or taking the loan for years 2 and/or 3 instead of all years. Too often it’s trotted out that the student will pay exactly the same amount when they reach the threshold to start paying back, so suggest or even state that the size of the loan doesn’t matter. BUT IT DOES. The bigger the total loan, the more the coping interest will be and the longer it will take to be paid off and so the compound interest grows further and the overall debt and length of time and total paid is bigger. These are important things to know and which would influence a lot of people, who maybe could then give their kids an extra £10k over the course of the degree or whatever. Yes, they will pay the same amount of loan repayments in their 20s when they hit the threshold, but that £10k might mean they have finished paying their student loans off by 40 or 45 instead of 55. It isn’t just the 20s and 30s when things can be tight when starting out with mortgages etc. the other end with uni costs is expensive too. And of course we are also looking at potentially having to work longer and not even consider retiring before 70 as student loan repayments will impact savings, pension contributions etc etc.

I know lots of people cannot afford to give anything at all. I know lots of people can just about scrape together their contribution if their kid only gets minimum maintenance loan. But lots could give a bit more. Advantage and disadvantage compounds over life. What happens to you financially when you’re young really matters in financial outcomes. If more people could reduce the debt their young adults start with, it would make a compounding difference to them later. That gap between those with family help and those without is growing and growing and help with student fees will be another thing that has a bigger impact than people realise because of the length of loan repayments.

@WombatChocolate

Very well articulated. You should be a journalist as that's one of the best comments I've seen re Student loans.

I agree. Very well put.

Well said Wombat.

People often say it is just a graduate tax, not a loan. Actually same thing.

When DD started work as a junior doctor she was very aware that others losing money to repayments each month, and decided she would put the same amount aside each month for savings/pension. If she were to continue this through 40 years she will have a decent nest egg.

As it is there will be times when she is really cash strapped, perhaps when she had young children and is paying nursery fees. There might be other times when she needs that money to put towards her forever family home. Either way us paying her University and her meeting us halfway by being frugal, will give a lot of future financial freedom.

We are obviously lucky we have been ab le to do this (with a bit of help from GPs) but it is worth so much more than a new car or a new kitchen would have been.

The point about being willing to be frugal….or money savvy is a good one. Again, the benefits compound and by 40s can result in people even without top paying jobs being mortgage free.

Students should be enjoying their time at uni. They should be socialising, but sometimes there can be a sense that every penny (and more) must be spent. Perhaps when it’s a loan and you’ve got the cash there it’s easier to spend more. When takeaways become regular and big nights out with loads of boozing and food become several times a week, plus expensive holidays etc, many students are spending recklessly - and will pay for it later.

It probably sounds miserable to suggest some kind of moderation, but sometimes moly being aware of spending and making choices about what to have and what can be cut back on helps. And perhaps if the money is given by parents, on the basis they need to be a bit careful, maybe being a bit careful is easier.

The savvy student can also become the savvy 20s young worker - possibly avoiding cars on lease and other choices which can have long term impacts.

They need to be aware of what things cost and how they buy/fund purchases impacts cost now and into the future. To be honest, many mature adults don’t have a grip on this stuff, so anything parents can do to help them in their understanding of this is good. Parental financial support can make a massive impact and set them up well for the next stage, but has most impact if not dished out as a free gift to splurge, but as part of their broader financial education which helps them understand budgeting, making choices, sometimes going without something and future impacts of choices. Lots would find these ideas too boring for students though.

Wombat I absolutely agree with everything you say. I too generally like ML but I think he is wrong on this. And I never understand what is meant by the term students paying off their loan. Does it refer to people paying off the amount they borrowed or the amount they borrowed + all the interest because if it's the latter, no wonder the percentage paying it all off is low.

And yes we assume that the monthly repayments will be affecting young people with mortgages and child care costs forgetting that it will affect how much people in their 50s and 60s can support their grown up children. Plenty of people in future in their 50s and 60s will also still be paying extortionate rents.

@Needmoresleep your DD sounds very sensible and wise starting saving already recognising she hasn't got to lose money each month to repay her loan.

@WombatChocolate your comments make a lot of sense - there are so many things now that have become normal expenditure which are luxuries. I think expectations have changed substantially over the last 30-50 years. This is in addition to the poor financial literacy of many. As you rightly say people just don't get the power of compounding to inflate a loan over time.

Our DS has just graduated and also is fortunate not to have had to take a loan. While currently only earning just above the minimum wage I was surprised with no nudge from us he announced last month he is saving 1/6 of his salary each month, what he can afford after housing, food etc. He bikes everywhere and cooks enough in the evening to take to work for lunch the next day saving quite a lot of costs each week.

Lots of excellent points @WombatChocolate . Can I just add one on the theme of "how much should I give my student child?" which crops up as a question on mumsnet frequently. There are often lots of people responding that they pay for the accommodation and then DC lives off the minimum loan of £4,767. I can see that this is a simple solution but I am always amazed by it: assuming 30 weeks of tuition, that is nearly £160 per week to spend after accommodation (and sometimes after food or at least some food if living in halls) which is an awful lot and is all debt that is going to be rolling up at a compounding interest rate for possibly 40 years.

But with the new loans they will be paying back the equivalent of the same amount that they borrowed. So in fact they are only paying the £60k loan, it is just going up with RPI. Therefore compounding really doesn’t impact the loan.

This is true, but the less you borrow the less you have to pay back and so the sooner you stop paying anything. Like that wonderful day when you make your last mortgage payment and you suddenly have a lot of spare cash every month.

Absolutely.

...until the day your eldest starts uni, and you start forking out for their rent...

@Tearsofthemushroom Is this even correct?

Whatever the interest rate is (RPI or otherwise), where do you get the impression there is no interest on interest (compounding) on this loan?

www.gov.uk/guidance/how-interest-is-calculated-plan-5

Oh gosh, save that money for a house and get a student loan. I'm now not working enough hours as I have a toddler so don't have to pay the loan atm. Women need more financial security than me. Don't wait the money

Waste*

The interest is just the loan amount increased by inflation so in reality the actual worth of the loan hasn’t increased. Each year the amount owed will increase but not be ‘worth’ any more than it was the year before. As long as wages go up with inflation it all equals the same value as when the money was borrowed. The calculator mentioned above shows you only pay back the equivalent worth of what was borrowed.
As an example, I borrow £100 this year. Inflation is 4.3% so next year I owe £104.30 but £104.30 is equivalent to £100 last year. The next year inflation is 5% which is added to the £104.30 but the total owed will still only be worth the same as £100 two years before in real terms.

errrr.... that's how indexing to RPI works..... The interest rate on the loan is RPI compounding every year and the RPI index effectively compounds every year as well. Inflation really does compound every year, just like the interest on a loan.

If the cost of my basket of weekly shopping is £100, it will go up by inflation every year. RPI is a (imperfect) proxy for inflation so the cost of my shopping goes up by RPI ever year. After 1 year, if RPI is 5%, my shopping costs £105, but after 2 years if RPI is still 5%, it goes up by 5% of £105 ie to £110.25.

Now suppose I didn't have £100 for my shopping in the 1st year so I borrowed the £100 at an interest rate of RPI. After 1 year, my loan has gone up to £105. After 2 years, my loan has gone up by 5% x £105, ie up to £110.25.

Can you see how they're both the same? That's what it means if the interest rate on your loan is the same as RPI flat. [The earlier loans were at a higher rate and so ballooned alarmingly rapidly.]

So I now owe £110.25 but it's really just like owing the same basket of weekly shopping that I started with. In "value" terms, my loan is the equivalent of the £100 I initially borrowed - it buys the same items of shopping - but it "feels" like a lot more.

The compounding of interest of the student loan feels like a lot more too, but it's going up in line with inflation, exactly like the basket of shopping.

I think most people don't find these things intuitive, but it really is just GCSE Maths.

Nevertheless, the truism is, that the less you borrow, the less you will have to pay back and the sooner you will pay it back. Which is why some are suggesting whether it makes sense to max out on the borrowing.

I see you've answered this more succinctly than I did!😎

So by your reckoning, compound interest is not an issue because except to the extent it exceeds the real value of money.

But it is not flat RPI is it? What about the 5% on the additional 4.3 pounds interest in the second year and so on and so forth for 40 years?

As @north51 explains in the post above, it is flat RPI and the only compounding is what happens with inflation itself.
The older loans were dreadful but Plan 5 is actually very reasonable.

For the financially GCSE-Math-challenged person that is me, if a person graduates with a debt of 50,000 and RPI is 5% every year for the next 40 years, if this person does not pay off any amount over those 40 years, how much does this person owe at the point of write off?

It will help me to see it in absolute figures.