Paying university fees with a credit card

[PrunellaModularis]

Anyone done this?

DD is going to be living at home for her final year so won't be taking out the maintenance loan.

I'm thinking of paying the tuition fee with a 0% credit card then repaying it over the interest free period of 3 years. Can this be done? Is it a good idea?

Given that she’s already had three years of loans, it’s pointless saving her the last year. Her repayments will be exactly the same. Plan 4 loan interest is inflation, not inflation plus 3%, so the total won’t increase in real terms.

@GameWheelsAlarmpost is sound.

IF I was planning on paying for it cash and DD not taking a loan I can see the advantage to doing it using a points card or something similar

Thank you @GameWheelsAlarm - I'll digest your post later.

A high earning graduate will not take 5 years to earn £40k. They will go into a job with a starting salary on more than that e.g. finance/tech/London, so it completely depends on the definition of high earner. Also those doing the calculations have as far as I can see, only assumed paying back the student loan at 9%. There's nothing to stop you paying back the loan far quicker than this and thus reducing the interest accrued, which for a high earner I would recommend.
I would add though that daughters are likely, but not always, to have more career breaks than perhaps a son (generalising I know!), so my advice of paying back asap would probably differ by gender.
In your shoes OP I don't think I'd do the credit card route as that will be repayable immediately the interest free period is over, removing flexibility.

Are there really credit cards which are interest free for 3 years on a balance of several thousand?!

It's RPI plus 1% under plan 4. Plan 5 is rpi +0% currently but thats 4.3%. Thats more than you will get in interest in most accounts. The compounding effect then means you are paying for longer and longer and longer and as a result you are paying far more over the long term than you originally borrowed.

Ive just run the numbers and if the student takes the tuition loan and the minimum maintenance loan and then repayments are triggered when they start a job earning £30,000 at age 25 they will have paid off almost £114,000 having only borrowed £45k. This assumes the student earns under 25k until they land the £30k job at age 25 and factors in inflationary pay rises only. If they get higher pay rises they will pay back more since in this particular scenario the actual student debt is double that and £112k gets written off at age 60. Plus the likelihood is that the interest rate will rise above RPI at various stages. Its recently been as high as about 7.3%

25k is a full time minimum wage job

Yep. I've got a Barclaycard. I'm sure there are others.

Oops sorry - just realised you were being disingenuous!

I actually wasn’t! It surpasses me with base rate being what it is that this is possible!

Sorry, would you mind explaining this a bit more? I'm just starting to try and get to grips with student finance.

I've carried about £15k interest and fee free on a couple of cards for the last 20 years.

Makes me about £600 a year in interest. If I went harder at it, I could probably double that at least.

Ok, I ran a spreadsheet for my DC about this. With RPI running at 4% £32k debt will become £144k and wiped away after 40 years if no repayments are made, this would be £70k when adjusted for inflation.

However, with a starting salary of £35k and a 4% pay rise each year (RPI) then after 40 years they would have repaid a total of £70k which will have been £31k when adjusted for inflation.

A job earning £50k means paying back £42k (£32k inflation adjusted) and it being all paid back after about 16 years.

Even a job earning £80k means paying back around the same amount as borrowed when adjusted for inflation.

I assumed the repayment threshold rose with RPI as it won’t stay at £25k.

If instead of paying DC’s fees I put £32k into an ISA and got a 6% average return (easy enough to beat this with an S&P500 index tracker if history continues) then it would become £290k or £65k adjusted for inflation (again assuming RPI of 4%) after 40 years.

4% is less than 6% you see, if you believe that you can earn more than RPI then take the “loans”.

I need to add a caveat that BOE doesn’t want RPI to stay at 4% (they are supposed to be targetting 2%) - but the reality is that higher inflation helps the government as it inflates away the government debt. However, even if RPI was 2% the results are exactly the same if RPI is the same as wage growth - if anything it’s easier to beat RPI with investing when RPI is low…

This is one reason why people I know took student loans out 25 years ago despite not needing them; because they could put it into an investment account and use it to make more money than they would ever pay back.

I think you are conflating 2 distinct financial decisions:

1. is it a good idea to borrow interest free on a credit card and earn interest /investment return on the money
2. is it a good idea to fund your child’s final year at university yourself instead of taking out additional student loans

The risk of (1) is that you lose or are tempted to spend the money and then can’t repay the money borrowed on the cards. It sounds like this is unlikely. In which case: fill your boots!

The issues around (2) are complex because there are lots of known unknowns around your DC’s future earnings. I think in one of his articles on the subject, Martin Lewis suggested that parents considering paying their children’s uni fees might hold off until their child got their first post uni job as this would give them some indication as to whether their child was going into a high earning career or not (although they could change careers later!) The interest incurred could be regarded as the cost of this option.

The IFS (https://ifs.org.uk/articles/student-loans-england-explained-and-options-reform) estimated that 79% of students on plan 5 loans would pay off their loans in full. (Some govt figures suggest a lower figure of about 60%). So only 21% would have any loan+interest outstanding after 40 years. You’d need to dig into their figures, but some of this 21% will have paid off almost all of their loan. - maybe only have a few £100s left outstanding. It’s quite difficult to conceptualise as we’ve all heard the mantra “if you don’t earn enough, you won’t pay it back”, but most people will pay it back in full, even if it takes them 40 years. Interest accrues at RPI, so in theory in real terms you only pay back what you borrowed but in cash terms there’s a lot of interest.

Also there are unknown unknowns: the govt may change the repayment terms of the loan. Could they increase the interest? Yes. Could they extend the repayment period? Yes. Could they change the repayment threshold? Yes. These are not “normal” loans!

There is also the simple cash flow benefit for your child when they stop repaying the loan earlier than they would have done. There is also the psychological benefit of having a lower debt figure. Do you/they value these?

It is also a way of passing on your wealth to your child sooner rather than later. This may/may not be relevant to you. So even if the overall effect of you paying the fees now versus them paying back the RPI-linked loan is neutral, you will have avoided IHT on that money. It may be more useful for your child to have the money towards a house deposit though.

And finally, a side point but addressing one of the points raised by another poster about women being less likely to pay back their loans because of lower earnings, time off for child rearing, caring, working part time etc. I’m seeing less of this in family members currently in their 20s and 30s than in my generation. There seems a much stronger desire (need!) to return to work - and work full time maybe with some WFH - from maternity leave - not wanting to lose out on pensions, promotions etc. And also needing both incomes. This may not be universal, but I would be cautious of making the assumption that women are less likely to pay off their loans in full than men.

The thing is that saying "adjusted for inflation" is misleading. Yes in general things get more expensive and so the £2 you spend on a loaf of bread or paying off student debt might in the future be £5 that can be spent on paying off student debt or it will buy you a loaf of bread. However the fact remains that even if your student only ever earns £30k with inflationary pay rises they will pay back more than double what they have borrowed even with half of their debt being written off at age 60. Plus the interest rates charged on student loans change constantly and so the fact that it's currently RPI+0% (i.e 4.3%) is only a short term thing. This time last year it was 8%.

If you can minimise what they borrow then that is a good idea

DD is going to be living at home for her final year so won't be taking out the maintenance loan.

A bit of a separate issue from, shall mum use her credit card to pay the final year's tuition fees?, but what is your DD actually going to use for spending money in her final year (transport / lunch/ nights out / haircuts etc)? Does she have a part time job, or savings to live off (the latter bringing its own questions re should you use a sum of money available to you only in the current specific circumstances, versus money which has any use you want / need to put it to, Including at some later date repaying part of your student loan, should you choose to)? Or are you going to give her 'pocket money'?

Back to the masters degree question; @PrunellaModularis you seem very sure that your DD won't want to do one, but people's circumstances / attitudes do change At the moment, your DD may have a career path in mind for which a higher level degree is no advantage and / or feels that academic study post 18 was more 'just something everyone in my circle does', than the opportunity to spend four years studying something that really enthused her, but this won't necessarily always be so. And at masters level, although there is a non-means tested loan available, a lot of universities, for a lot of subjects, pitch their fee at more or less the same amount as the fixed sum available (there is no separate maintenance element claimable). So unless your 'God, no' response is actually your own to the idea of providing funding for your DD past bachelors level, if you have money available that you could use now for the fees, but would rather have somewhere earning interest, then would you consider doing the latter, but mentally ring-fencing it, at least for say 5 years, against the possibility of your DD deciding or needing to undertake a masters?

"panic masters" are a very real thing..

I think on the new system I’d do everything possible to minimise the fees. As long as you are confident you can manage the credit card debt, the compounding effects of the loan interest is horrendous. 40 years of an extra 9% tax - no thanks.

Would it make more sense to use the same money to pay off some of the existing loan that is already accruing interest and still take out the tuition loan for the final year fees?

It is worth trying. I tried to use my credit card to pay for my DC’s tuition and accommodation but the University didn’t accept it. Which is too bad as the points would have resulted in a nice cash back bonus. I had to use my debit card.

Or are you going to give her 'pocket money'?
She has a part time job. I'll provide food and petrol because, well, she's my daughter.

Although from what I've read above, I'm wondering if she should take the minimum maintenance loan and put it in a LISA?

opportunity to spend four years studying something that really enthused her

She's already doing that with her 4 year MFL and humanities degree. No desire to do a Masters.

I thought about paying DDs fees upfront.

However I dont expect her to get a high paying job so it seems to make more sense to eventually put the same amount into a house deposit.

We’re in the same situation (she’s at home but commuting to Uni) and are paying our daughter’s with savings but I would have done it on a 0% card otherwise.

I didn’t like that Plan 5 went over 40 years and apparently the student loans company appear to be able to charge whatever they like in interest over that 40 years. It’s gone from 7.1% to 8% in a year (2023-2024). I can always borrow money cheaper than that.

End of the day I think of it as early inheritance, there’s not much point in her getting everything when she’s 50 she has to live in the meantime and if it’s one less bill for her in her 20s and 30s that’s fine by me.

I think interest rates on student loans have gone up. Maybe not smart to put the money in a Lisa now.