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?

We did it because it was cheaper than the school fees we were used to paying previously - it was a complete no brainer for us. There was a small element of thinking we were not adding to the debt burden of the nation by doing this, in similar form to us using private health for some things.

I can see your logic for your DC on Plan 5. Your DC are protected from the psychological weight of seeing their loan grow, by the positive of seeing their investment grow, which seems to be an issue for some current graduates, and their cash flow should be fine as the interest and return are offset. I suppose you have to trust your DC not to blow the investment.

Your only risk/benefit is if the investments underperform or the govt terms on the loans change in some detrimental way. Even with the best planning there will be some leakage due to mismatch of interest payments and investment returns. I think there is a mad quirk in the loan system where although you make payments monthly they are only credited to your student loan annually - in the meantime the money just sits in a government general pot - it doesn’t appear that you earn any interest on this money while it’s sitting there - it’s not really clear, so wld need to be double checked, but wld be another reason why the 2 IRRs wld not match even if the headline interest rates do.

@pastaandpesto I have another counter argument to add (but some may think it is not important).. I have had a long chat with my ds (final year) about student loans, after he came home this weekend… he says that there is a very widespread perception amongst his peers (who have student finance) that the student ‘maintenance’ loan is spending money… ‘the student loan has just dropped [into my bank account] - so I’m going to buy [big ticket item]’. (Presumably in these cases the parents are paying the rent costs).

I’ve mentioned upthread that we give my ds £300 per month during term time - this has to cover all food (he says he spends £120 per month on food), bills (£50 per month), and going out / leisure. He works during the summer, to top up his discretionary spending fund (and for holidays etc), and in year 3 he has had a zero-hours contract job on campus. He lives fairly frugally, and is very conscious of being careful with money. Which I think some students (with min maintenance loan of £4500 (?) ish) may not be, if they see it as unfettered spending money, that is ‘free’ / that they are entitled to spend. If term time is 31 weeks, this equates to approx £145 spending money per week at university. If parents are paying the rent (and if it is a catered hall), then this is a huge amount of money for socialising / drinking / shopping on clothes etc etc).

I just think that students in this situation are going to fall into very bad habits, and are going to assume they can have a certain standard of living, even if they aren’t earning. I think students (who take student finance) should be encouraged to budget, and live as frugally as they can, to minimise the amount of loan taken, if at all possible. If it is possible to just take the tuition fee part of the loan, and the parents pay the rent, and the student to work during summers (or in a gap year) or with a part-time job during term time, to pay for food / spending money, then that could potentially significantly reduce the length of time the student will be paying the 9% repayment.

Also, another counter argument is that I think it will be highly unlikely that a graduate will choose to use a big chunk of invested funds (if you invest instead of paying upfront) to pay off their student loan, as in that stage of their life they have a lot of competing demands for their money, and if repayments at that stage are very low as they are earning only just above the threshold, then I imagine it would seem crazy to pay off the student loan, as the opportunity cost is so high. Also, if they fail to get a graduate job (or any job), which may be an increasingly likely scenario, then (if they are in control of the funds) they are unlikely to get means tested benefits, and would probably just use the lump sum to live off, for a period of time. They may decide that they don’t want to live at home again, so rent somewhere (which would very quickly erode the lump sum). [this happened to someone that I knew, who blew through over £30,000 in one year, in rent and spending money]…

So I suspect, if the parents decide to invest the funds (and gift it at graduation, or whenever) instead of pay upfront for uni costs, then there is virtually no chance that the invested funds will be actually used to pay off the loan…

During the tax year that they turn 18 they/you can put £9k into a Junior ISA before their birthday and £20k into an adult ISA after their birthday, so £29k in total.

That sounds like a well balanced decision for your circumstances, assuming you have one pot of money. The opposite decision is logical and easiest for those who have multiple pots of money, or the reasonable chance of them in future, so they can afford the fees and future deposits and potentially anything else the DCs might need to get them started in adult life.

You know your DCs best, so are better placed than anyone here to make a calculated judgement about their future direction and attitude to money.

DDs observation was very much the same as MamblesPambles. Plenty of her contemporaries seemed to think it was free money. More worryingly some, whose parents were really having to stretch themselves to help out, were seriously spendthrift.

Because we paid, DD always knew where the money came from. We have needed to be frugal as a family, so she was not about to blow it. Both DC are happy now not to have to factor loan repayments into future decisions.

The big IHT benefit is if grandparents are able to pay. There are quite a lot of rules around it, but it worked for us.

@WW3 , thank you for your post. I did a bit of digging about that quirk you mentioned and from what I can see, although the balance is adjusted annually, the interest takes into account the fact that payments are monthly. Otherwise that really would be outrageous! I couldn't find a really definitive answer though, so it would definitely be something I'll ask DC to check in the actual loan agreement. Regarding the upside/downside risk of a change in performance or in the loan conditions - I guess the idea is that we are hedging against this in both directions - we could advise DC to pay off the loan if the balance tips (or make a different decision in Y2, 3 and 4).

@MamblesPambles thank you for such a thought-provoking post, it has really made me think.

On the one hand, the idea that they may have a more pressing need for £50K (or thereabouts) when they graduate is kind of the point - we're giving them that flexibility. But obviously there is a big difference between proactively choosing to save the money for a deposit (good), seeing it slowly erode by using it to supplement an inadequate income (understandable, but not ideal) and pissing it away (bad).

I'd like to think that the DC would be sensible (we all hope for that, don't we?!) but I'm not naive enough to think that they would definitely make what we would consider to be the right long-term decision. I think we would have sufficient financial levers to keep control (the prospect of further support down the line being the main one), but I wouldn't relish the prospect of having to enforce that and potentially souring a good relationship. I'm definitely going to think about that further.

Your other point about being able to manage the supply of financing is a really a very good one, and not something I had considered. I think a weekly allowance is much easier for a young person to manage in their first few years of independence - perhaps especially important for DC who have been used to a relatively comfortable and cushioned life at home. I'm going to think about this too.

@spellbouwned , we're something in the middle camp here. We will be able to help them with deposits as well as fees, but not to the extent to make the decision irrelevant iyswim. For example, if they want to live in London or the SE, a £100K deposit may be more important to them than leaving university debt-free but with only £50K as a deposit.

Thank you again, really useful food for thought over the next few months before we make a decision.