Question for those who are paying fees upfront (or considering it)

[studfin]

I've namechanged for this, as I know that threads about money can be sensitive. And I want to say from the start that I know how incredibly lucky we are to be in this position. This isn't a stealth boast thread - I'm genuinely unsure what to do and interested to hear from any others in the same position.

Basically, due to a combination of fairly high earnings and inheritance, we have the option of paying the DCs' tuition fees and maintenance costs without loans. This won't have an impact on our daily life, and we would still be able to help DC with a house deposit when the time comes. We've already basically decided to fund their uni accommodation and living costs without them taking maintenance loans (they both have pretty low key lifestyles, so we wont be bankrolling high end living), but can't decide re tuition fee loans. Partly it's a financial question re interest etc. Martin Lewis says it's usually better to put the money in a high interest account and pay off the loan later once your child needs to start paying it off, but I don't know whether that factors in tax on savings interest (we're both HR taxpayers, and use ISA allowances already for our own savings). Partly it's a financial responsibility question - in that, do I risk my DC placing less value on their education because there's no financial investment on their part?

If I pay it for them upfront, part of me feels guilty for perpetuating inherited privilege, the other part thinks that, given the state of the jobs market and the uncertainty of the future, I should be making their lives easier in every way I can. I went to uni back when it was free, and my parents paid for my accommodation, so I'm also very aware that I had this privilege myself (I did take out maintenance loans, but they were pretty small really).

Haa anyone else made this decision?

@WW3 Yes, I agree. Talking about it all with a friend just before Plan 5 started, she was surprised that we were planning to pay upfront as ‘Martin Lewis says it’s just like free money - and unless you are a big earner you’ll pay hardly anything back’. The MSE website view has shifted away from this, but still seems to suggest there is no point paying upfront. But I suspect it is very problematic, if students have this feeling that it is ‘free money’, as I suspect some may not bother budgeting, and will just spend what they have. My dc (currently in year 3) is in a house-share, and spends £30 on food a week (buys own brand Lidl cereal at 80p ish a box!), and cooks a lot from scratch. Doesn’t go out drinking very much at all, but does spend money on trips with a student society he is involved with. Has got a job during the summer breaks, and in year 3 has had a zero hours contract job during term time. I’m so proud of the way he has budgeted, and is supplementing his money by working. I don’t think he has been left with a sense of privilege - i think the fact that he doesn’t have expensive habits (going out drinking regularly is hugely expensive) is great..

@MamblesPambles @WW3 @Fabfabfab University fees are exempt from IHT as classed as ‘education’ which is exempt from the 7yr rule. So you’ll be fine to give your DC the lump sums if you wished.

@NotDonna Thanks - but would gifting your dc a lump sum to pay off their student loans after they have graduated (or maybe 10 years later?) still count as education, and so be exempt?

I’m not sure about ten years later tbh. Possibly as it’s the actual student loan so you could evidence it easily enough. I do know that if you pay them at the time it’s all fine.

Interesting thread, because our take on it has been very different from the majority of PPs.

You can overpay the tuition fee loan in part or in full whenever you choose. But they only get one opportunity for each year of study to take it out. There's no changing your mind and thinking that actually it would have been better to take the loan.

There are so many circumstances in which the loan may make more sense. If they choose (or end up in) a low-paying profession. If they become SAHP. If they are unable to work because of illness or disability. If the government decides to change the terms of historic loans to make them more favourable, or even write them off altogether.

You also need to factor in the opportunity cost of paying upfront. I'm confident that we can keep the money invested at a rate of return that will comfortably outperform the plan 5 interest rate.

So no, we won't be paying the tuition fees upfront. DC will be taking the loan and we will keep the money invested and liquid. We will reassess again when they graduate and make a decision then about whether we pay them off, once it is clearer which is likely to make more sense based on their circumstances.

But they only get one opportunity for each year of study to take it out. There's no changing your mind and thinking that actually it would have been better to take the loan.

You can apply for the loan up to c.9 months after the start of that academic year, so in terms of their maintenance, a student being financed by parents could ask for the non-means tested portion of the loan at some point during the year without their parents having any effective say in this (they might express their disapproval, but it's the student's loan and no parental input is involved in just obtaining the basic amount).

The 'one opportunity' is this money only being available to the student through their status as a student - they can't go back and access the amount that they would have been able to borrow if some years after graduating they find that they are desperately in need of that amount.

We are paying up front, helped by a family member who is gifting £12k/year for each DC.

It hard to say what the right option is, but I couldn’t see that putting the same money in a savings account to pay the fees loan back later would fully cover the interest on the fees loan.

We approached it with 2 likely scenarios - DC1 is at oxbridge and their career interests have a good likelihood of high earnings in the future. DC1 seems to be one that would pay the loan off in full, so there was nothing to be gained by taking the loan (no write off etc). DC2 is less academic and drawn to future careers where DC2 is less likely to be a high earner, so DC2 would have the loan in the background for most of their adult life but mostly only repay the compound interest, which seems pretty miserable. Paying up front seems better financially and gives both DC the greatest financial and mental freedom later.

@studfin We have paid upfront for two DCs. Like you, I (sadly) inherited a lump sum a year or so before my eldest went to uni, so used it to pay off our mortgage and fund the uni fees. I deliberated over it for a while. This was at the tail end of Plan 2 loans, and Martin Lewis was still telling everyone that most grads don't pay it all back, but:

• ML's advice was primarily aimed at encouraging YP from low income families to not fear the debt. The advice to higher income families who could afford to pay was, at best, cursory.
• ML used contemporary data to say "most grads don't pay back their loan in full". When I read this, my thoughts were "how can the country afford to subsidise this ... surely it isn't sustainable for the taxpayer and the Govt wil have to tighten the screws". (It turns out I was right - they have now frozen the Plan 2 repayment threshold so that grads pay back more, and introduced a new plan - Plan 5).
• I was willing to bet that my sons would be relatively high earners.
• I noticed a flaw in the default assumptions on ML's repayment calculator. It assumed steady (5%?) wage inflation. In our own careers we've beaten that by getting promotions and changing employer. When I increased the percentage to reflect my own (modest) career path, the repayments increased significantly.

I never felt guilty about paying up front - quite the opposite, because if they do turn out to be low earners I will have saved the taxpayer some money. But I did warn my boys not to tell their friends about it, in case they were resented.

As our mortgage has been paid off, and we got lucky with another windfall when DH took redundancy, we are also able to fund house deposits. We are (touch wood) fortunate, and intend to pass in as much as we can to our DCs to give them a secure start in adult life (and minimise future inheritance tax).

We could afford to comfortably pay the fees and maintenance (and give a London house deposit later) but we've opted to take out the maximum loan entitlements. For us the potential investment returns are significantly higher than the loan interest rate. But we have a high risk tolerance over a long time period so it works for us. We have the same approach to our mortgage, which we can afford to pay off in full but have it invested instead.

The guilt over their privilege hasn't been a concern at all.

Thanks so much for all the replies. I think before this thread, I'd have been leaning towards getting DVC to take the loan, as I suspect that if you manage the finance carefully then it's still better to invest the money and repay later if and when your child is earning enough to start repaying it (though I guess it's marginal, and there are question marks over IHT), but I hadn't really considered the emotional impact of a large debt, and I think that might end up swinging the balance for us.

@studfin it's worth adding something to my list of reasons for paying - another emotive reason - I have a warm feeling knowing it's what my mum would have wanted me to do with the money I inherited from her. If she had still been alive, reading stories about graduate debt, she would have worried for her grandchildren.

We paid everything for our DC. Both DH and I got fees and a full maintenance grant paid for us when we were at University and we felt that we were putting our DC in the position we had been in when we left University ourselves. We saw this as intergenerational fairness.

People get hung up about “inherited privilege” because the media bang on about it all the time. For me, being able to put my DC in a good financial position was a huge motivator and encouraged me to work hard all my life. My DC also had the “inherited privilege” of a family with two parents who stayed together, valued education, read books, sat down to family meals together where possible and talked to each other. Leaving University debt free is a small thing in comparison.

Following on from my post upthread about our decision to not pay upfront.

Another reason we are holding fire until after graduation is that I think graduate prospects will continue to decline.

A few years ago I would have been confident that DC1 (heavily mathematical STEM degree from a top uni) would have the option of a high paying career, and being able to follow the same life trajectory that we did back in the nineties.

But AI coupled with worsening global conditions is rewriting the rules and I think graduating in 2030 is going to be pretty ugly, if I'm honest. We will undoubtedly help the DC financially, but I want to keep our options open on how we do that for as long as possible because there is so much uncertainty ahead.

The only circumstances in which I would pay upfront would be if I had effectively limitless wealth and could comfortably afford to pay fees AND a hefty house deposit AND help them with further training AND help them get a business off the ground AND support them in potential periods of underemployment AND help them with nursery fees AND etc etc, all without compromising our own lifestyle or our ability to do the same for other DC.

It's not necessarily true that arts students don't earn much. I'm at arts graduate and my income is in the top 1% of the UK population.

Yes, it’s a tricky one. For us, we are budgeting carefully and trying to avoid eating into savings (while paying dc1 uni costs). I don’t have a high income - and it is being used each year to cover the fees / accommodation costs, and is then topped up from dh’s income (it’s all in a joint pot anyway) for his living expenses. I am finding it psychologically much easier to do that (when we would be housing him and feeding him if he were at home anyway), so it seems more manageable with regular amounts going out. I think if we were to have waited until after graduation, there would have been interest accrued on the loan for 3 years, and I think it would be psychologically more difficult with a lump sum of £50k +, thinking - should you pay off the student loan (which would only save you maybe £30 a month in interest payments in those early days, which doesn’t seem a lot), or would you put it towards a property? I think the temptation would be strong to put it towards a property!

It seems psychologically much easier to just pay upfront in small chunks!

I'm glad the perception of "free money" is changing as it wasn't helpful or accurate. Several years ago a student was complaining that due to their parents income they were unable to get the higher maintenance loan. Their parents paid for accommodation and some other costs such as food, phone and transport so maintenance loan was only needed for socialising and clothes.

I was surprised by the attitude as they hadn't been aware of the need for repayments. The drive to not create fear perhaps may have created the wrong perception so actually lead to poor financial education.The student debt is so high that I doubt the Gov will forgive. For careers such as nursing I would fully support non repayment whilst working as nurses.

I have empathy for the students saddled with debt and there is an emotional toll that if you can afford to pay it is a gift to your dc.

I’m hoping to pay fees for my dc but we can’t afford fees and rent and maintenance and a house deposit for after so it will depend on what university they want to go to. I will heavily be encouraging a degree apprenticeship or similar seeing as though the job market is fucked atm but hopefully new careers will emerge. I don’t think three years chilling with your mates in a shared house/ flat and doing a bit of learning is worth tens of thousands of pounds of debt. Which is sad for my dc as I loved that about uni but I don’t think it would be the same if your parents are paying for it all anyway. I don’t understand how in one generation opening access to university has gone from an awesome opportunity to a millstone around everyone’s neck.

I wish we'd done that now, pay it in chunks as we went along but with two DCs close in age and potentially overlapping at uni it seemed too much (with hindsight it would have been OK, but our business took a downturn post Brexit and we were worried about that at the time but it has stayed fairly steady after the initial downturn). I was also swayed by ML and by not wanting to jeopardise future help with deposits. We also wanted to build our own retirement savings.

But @pastaandpesto those factors will impact everyone, not just your DC. The repayment threshold for paying back is already only a few £k over the minimum wage, and if graduate prospects reduce further then that margin will shrink further. The underlying principle is that graduates fund the bulk of their own university fees, not expect the general taxpayer to cover it. Once you accept that, paying up front makes sense, unless you think your yp will earn significantly less than the average graduate in their own generation (not averaged over past generations).

I think it would be so much more transparent if there was a really clear explanation of what the current student finance model is - ie if you take a student loan then you are opting in to an increased income tax model (for up to 40 years, depending on income / speed at which clear the ‘debt’).

So:

Without a loan, income tax currently is:

£0 - £12,570: 0 %
£12,579 - £50,279: 20%
£50,279 - £125,140: 40%
£125,140 + : 45%

With a loan, income tax will be:
£0 - £12,570 : 0%
£12,570 - £25,000 : 20%
£25,000 - £50,270 : 29%
£50,270 - £125,140: 49%
£125,140 + : 54%

Bearing in mind, with thresholds potentially frozen, fiscal drag will pull more workers into higher tax bands, and the loan ‘repayment’ threshold will get closer to the personal allowance threshold, during the life of the loan.

Essentially I am paying now for my dc to be on a reduced income tax model, compared to if they took the loans. It is a very personal decision though - some may feel it is not worth it.

I can see why the Govt & SFE haven’t explained it in this way though - increasing income tax is a massively political thing, and I can’t see any political party getting away with a plan to increase income tax by 9% - but actually, they already have, only it is just called something else, and it is not quite universal (those that choose not to go to uni, or who don’t take the loans, don’t pay it)..

Also watching this thread with interest as have a 14 year old. For years I was confident in my opinion that the student loan system was pretty fair - however the recent publicity about it has really shaken my faith in it and am seriously considering how we could help our son. We’re comfortably off but not super wealthy but am aware we’re in a privileged position to be able to even consider it. I feel really depressed that people are (totally understandably) thinking that their kids should only do a vocational degree rather than considering degrees with high quality teaching about subjects that they feel passionate about.

And, with employee's NI, the rates are

0-12,570 - 0%
12,570 - 25,000 - 28%
25,000 - 50,270 - 37%
50,270 - 100,000 - 51%
100,000 - 125,000 - 71%
125,000 + - 56%

I get that, but we're not ruling out paying off their loans. We're just deferring the decision. We may choose to pay them off the day they graduate, or when they secure their first grad-level role, or when they are ready to buy their first home (although at which point they may prefer the additional £50K in cash, in addition to what we already have ring fenced for this), or basically at any point over the 40 years of the term.

It may be that they find the psychology burden of the debt really weighs on them, in which case we can fix that for them. But it might be that they are entrepreneurial and comfortable with risk and would much rather we help them in a different way.

What we will not be able to do is go back in time and make a different decision, if we pay their fees up front.

As I said, were confident that we can keep that money invested in a way that will comfortably offset the interest that accrues while they are actually studying. Then we will reassess when they graduate.

Personally I think in the longer term poor graduate employment and spending power is going to be such a drag on growth that I think the government is going to be forced to act to reduce the burden of student loans. I may be wrong on this of course, but that is another factor in the back of my mind.

Deferring the decision seems such a straightforward choice to me that I am now genuinely worried I am missing something.

And to @NeedingCoffee 's point (thank you for that, a really useful explanation that I agree should be made clearer), another decision trigger might be when the DC first hit the threshold for repayments.

We are paying upfront. While I can see the arguments for investing instead, I worry more about the downside risk than the upside risk on something so fundamental.