Plan 2 Student Loans- much higher interest, Times article - parents pay off

[fluffythecat1]

Our son is potentially heading to university in a few years. I follow Martin Lewis for his excellent financial guidance and have been concerned about his advice on student loans. Before, it was advisable to get a loan and in likelihood not pay off the full amount under the old system, now it seems the interest on them has changed as discussed in this Times article from yesterday, meaning that even with a good job, there is a significant long-term burden for graduates.
What are people’s thought? Gap year to earn some money before going? Put any money in a child trust fund towards it? Reducing the amount of loan taken looks key.

I had £21k student debt — why did my twin owe £40,000 more?

https://www.thetimes.com/article/8598d6cf-cb9e-4e78-9a51-7b1023ce53a6?shareToken=e66982418968f371f402de3a5c210f99

Well, when he's an adult and wants to go to university, he can finance it however he sees fit.

It’s now plan 5, with different terms, so best to do some calculations based on that.

Definitely. And you and your DC should read and think about those terms carefully.

We heard a bit of a Martin Lewis podcast recently where he’s up in arms about the plan 2 loans, which iirc he was wont to blithely encourage students to take out. However it was clear if you’d read the T&Cs (which DH and DD did) that the terms were liable to change - both the interest rate and even potentially the duration. DH and DD set up complicated spreadsheets to calculate various possible outcomes depending on such changes, her potential salary profiles etc.

It depends on how you view student debt. I have one graduate child and one still at uni, eldest is on plan 2 and my youngest will be on plan 5.

How my eldest sees it, they needed the degree to get into their field, it is a much harder route without the degree. They graduated 18 months ago and on £42k in a graduate job. How they view it, they do not care about the amount they owe, it was a means to an end. It is not a "burden" to them. They just care about their net pay, everything else that comes out, pension, tax, NI, student loan repayment doesn't really impact them, they have little choice, what matters is what hits their bank account every month.

I can't remember their pension contribution percentage but if you take £42k and run it through a salary calculator the they pay £101 a month toward their loan. They are not looking to clear it, just pay what is automatically taken out from their salary.

They got minimum maintenance loan and we topped up to full loan amounts. If we had the money to pay £45k to cover tuition and maintenance loan amounts we wouldn't have done this, they would still have taken out the loans and we would have invested the money to help them pay for a house deposit instead.

So parents shouldn’t even discuss the topic ?

And whether his parents can/will help with financing should play no part in that decision?

We are having these conversations with our dc right now as one headed to uni in sept and the other in a few years time. I think it’s good parenting to give financial advice- ultimately they don’t understand the burden they are taking on so it’s up to us to educate them as much as we can now so they go into it with eyes open. Our main points are- 1. Only go to uni and take out the loans if you are TOTALLY SURE that the job you want needs a degree to do it and therefore it’s a worthwhile investment 2. Be aware that on current plans you are likely to pay it for 40 years until written off unless you manage to get a very well paid job early on 3. This means they should look at the monthly repayment amount rather than the total they owe which is likely to go up with interest/inflation despite your repayments. Checking the total owed every month is likely to be depressing so best ignore it. Yes we are encouraging our dc to earn money towards their uni costs but that will be to top up their maintenance loan, not instead of it. I won’t be encouraging them to put any of their child trust fund towards their student loan- that should be for large costs such as house deposit and will ultimately help them pay their student loan off afterwards. We need to remember that someone with 50k debt is repaying the same amount each month as someone with 100k debt and neither are very likely to clear it unless working in finance!

I think best just to consider student loans as another tax on your earnings and not think about it too much.

Unless sufficiently affluent to be able to do both, I still think that having a lump sum for a house deposit is more worthwhile than using the same money to avoid taking out student loans.

I agree it's definitely worthwhile considering whether there is another route other than going to university, but I do disagree that getting a degree is solely a stepping stone to a job. Greater education is always valuable.

Oh come on! They're 18 year old kids just out of school when they sign these contracts with the Government.

The schools/colleges push them into Uni without educating them on loans, interest rates, inflation, compound interest.

Most adults are pretty clueless too judging by a similar thread on another board.

I wish I'd got myself better informed before DD started her 4 year humanities degree (mandatory year abroad for which she got no funding from Turing).

I hope students, graduates and parents write to their MPs, the Chancellor and the Education Secretary about the ridiculous terms on some of these loans. DD is on Plan 5.

Plan 5 loans are designed so that students are more likely to pay them off than not - thanks largely to the 40 years of payments. But many students will pay back much more than they borrowed. A student borrowing the full tuition and maintenance loans and then working in a role such as a teacher could pay back twice the amount they borrowed (like a mortgage).

Martin Lewis has a lot to answer for in my view

I find it extraordinary when people say it is just another tax so don't worry about it. If we were hit with a 9% tax increase on over 27k, ther would be riots.

On 25k for plan 5

Yes, @Trayboochaypointing out that on a teacher’s salary you would be paying back twice the amount of the loan!

@Makingsenseofitall Why? The premise, as many are saying, is that repayments are based on what you earn! They are not bank loans. Until now, mid to lower earners barely notice what they pay, as others have said. Many jobs require a degree so it’s a no brainer. DD went to uni in 2010. Paid off 12 years later - 4 year degree and 3 years training afterwards). Yes, she’s high earning and that’s the key. At 18 they are hopeful of this but they don’t know. DD earns a lot and is self employed.

The government (us) has £250 billion of debt with these loans and clearly more need to pay them off. It’s been under 50% doing this and we cannot afford it - hence the changes. Martin Lewis was spot on when loans were wiped out much earlier. Of course earlier loans still
have a low pay off rate and cost us lots of money.

Careful thought needs to be given to this now. It’s very expensive to do a fun degree with no future plan. People who have plans and expected earnings should still do a degree. Maybe others should not.

Also what else could the money be spent on if paying up front? ok if you have £1/4 million lying around but most don’t. A clear evaluation must be made on how to save when dc are young , what to pay for and whether to go at all.

Being cynical, many sixth form colleges pride themselves on students gaining offers from Oxbridge/Russell Group and other universities and feature this prominently on their websites. I wonder if they fully inform students/parents on the financial implications and the possibility of other routes, when such offers serve them by validating their ‘excellent education.’

The "don't worry about it" comments are mostly to do with people worrying about the size of student debt, surely?

This isn't a debt like other debt. You may not pay it off. No one will be battering down your door to get their money back. The amount you pay back works in line with income, so you are never going to have to get swamped by ever increasing debt repayments.

If you want higher education your options are to pay for it yourself, find a family member to pay for you, or to take out a student loan.
(or to get an apprenticeship, but not possible in all subjects, and limited in number)

If you want to pay for it yourself, this is likely to require an extended period of working and saving, continuing to live with your parents (or shelling lots out in rent), during which time all your peers have been to university and finished and you will be starting as a mature student who may have lost interest in study by that point. In the case of some subjects, it's likely to involve a longer study period as you re-learn concepts you will have forgotten. Yes, it's a choice, but may be less palatable.

Parents are likely not to have the money lying about, or would prefer to give it to you as a lump sum for a house deposit.

Or you take out a student loan, and accept that you have to pay the tax. Yes, you'd probably rather not. Most people would prefer not to pay NI or Income tax either, but they get used to doing so. This is still likely to be the best option for most, and worrying about it will get you nowhere.

@redskydelight I completely agree. I think some thought needs to be given to what course and where but options to get an apprenticeship might be very very competitive. Other apprenticeships are limited in scope with average employers. Eg a good engineering degree keeps options open and few apprentice degrees are at the elite universities. Some are very basic degrees too with limited scope. Schools do talk about alternatives but often, for humanities students, they are very limited.

Please, may I ask, how much are the grants we are talking about?
And more generally, how much roughly does it cost for a year of fees + accommodation + living expenses (average, living in a houseshare for ex) ? Google says 20-30k, is that correct?

It is a shocking burden on our young.
Our country deserves to run out of teachers, nurses and doctors.

Looked into it for my child.

Unless I'm missing something plan 5 is basically a graduate tax of 9% on earnings over 25k for those who will end up earning up to say 50/60k and will only really be paid off quickly for pretty high earners.

I don't get the idea that students shouldn't worry about it as they will never pay it off as again unless I'm missing something it's just over 2k a year in repayments for someone earning around 50k.

Basically means young people should think about whether university is for them especially when considering the interest these loans attract.

Makes sense for those likely to be become high earners but for those who are likely not to be the costs of going should be made clear.

I think it's best to think of these loans as a graduate tax. Most will pay for 40 years before they are wiped off.

I just varied the numbers I had in my spreadsheets from looking into this for my son who is going to Uni next Sept.

If he gets £15k loan for each of 3 years, so £45k total, and if he was lucky enough to get a £42k starting salary that increased by 4% each year and if inflation (RPI) ran at that same 4% rate and the repayment thresholds also increased by RPI then he would end up paying back the loan in about 35 years with a total amount repaid being £95k (but this is only £47.5k adjusted for inflation). This is also the equivalent of getting a mortgage for £45k over 35 years fixed at 5%.

If he only gets a teacher starting salary of £33k he will pay back £60k and then the remaining £90k loan will be wiped. This will have been the equivalent of getting a mortgage for £45k over 40 years fixed at 1.5%.

If he gets a starting salary of £66k then he will also pay back about £60k but it will all be repaid over 18 years. This would be similar to a mortgage for £45k over 18 years fixed at 5%.

The recent issue in the news about freezing thresholds is that it will increase the interest paid by all but more so for those on the lower earning end of the scale.

If I had £45k to give him to avoid student loans I wouldn’t. I would invest the £45k in the stock market or his first house purchase.

@VoiceFromThePit I thought everyone calculating the current loan suggested dc on lower salaries would pay more because it would be over a longer period. You also haven’t factored in promotions. A £42k starting salary is high. So why would they not expect to earn £100,000 in 10-15 years? Then they pay off far more quickly. Teachers get promotion too - heads earn £80,000 plus much more. So just adding in inflation doesn’t work. Alsogoing part time greatly reduces what they pay too.

This is not a tax. This is very much a loan with compound interest, worst of all, you don’t even know when you’ll stop paying. For those saying you’d rather invest the money in the stock market, good luck getting a return greater than what the loan will cost.

Personally Im hoping DS will have a good career, I’d rather he started adult life with a little debt as possible.

I have always disagreed with Martin Lewis on this one.