Should DD use JISA for uni fees or get Plan 5 student loan

[NotDonna]

DDs stocks & shares JISA has matured so it’s her money and her decision. It’s currently in a Vanguard life strategy ISA. I’m not sure either way so wondering what other people’s thoughts are please. She’s contemplating using it for uni fees rather than getting the student loan. She’s starting uni in Sept so would be on the new Plan 5 student loan with the following terms…

1. ‘interest’ added day one of degree at RPI which is currently capped at circa 7% atm (there’s no additional interest just RPI)
2. she will pay 9% of any gross income above 25k per annum
3. she will finish payments after 40 years or once full amount paid off
4. any government can change these terms retrospectively- nothing is concrete

Her argument is that…

1. 40 years is a long time not to expect change. Gov could start adding interest on top of the RPI rate for example.
2. the S&S isa isn’t performing brilliantly ie not above inflation or RPI in fact it’s been loosing recently. So she thinks the value will be less in a few years time than it is now so may as well use it before it’s worth less.

Her main worry is that governments can change the terms and I understand this. She’s trying to make an informed decision but there’s not much info out there. Even Martin Lewis isn’t certain about the whole ‘terms can change retrospectively’ bit!

What sort of career is she going for? If it is any career that pays average wage or above, I think she would be better off using the JISA as the Plan 5 student loan penalises middle/average wage earners compared to the earlier Plans. They actually end up paying more back than the high earners will.

Thanks @AP5Diva she’s going to be studying Business at a decent uni (grades permitting) is pretty savvy so I’d expect her to be earning relatively well and above average (but not mega bucks). I’d expect that she’ll probs pay it off within the 40 years unless she has lots of babies and decides to be a SAHM.

It doesn’t have to be all or nothing though does it? She could use the JISA the first year of Uni, and then reassess every year? If the markets start doing better she could invest and then take out a student loan for 2nd & 3rd year or not. If, for example, she were to use the JISA funds for years 1&2 and loans for year 3, then she graduates only £15k in debt (avg borrowed for one year tuition and maintenance), that’s a lot faster and easier to pay off than £50k! And she’d still have some left over to put into a LISA or other savings towards first home & retirement.

Ooh that’s not a bad idea @AP5Diva thank you. Most people in general are saying that the loan is a no-brainer but I do see her point especially when the terms can be changed retrospectively.

The loan was a no-brainer, but I’m wary of this new plan too. Even Martin Lewis says something like over half of graduates will pay off the entire loan plus interest compared to less than a quarter pre Plan 5. And 40yrs of repayments takes you all the way to state pension age in some cases (eg if you go for a PhD). It’s worth not being hasty.

DS has been drawing SL for the tuition fees only and not drawn a maintenance grant and is instead using his savings and wages from a part time job. He is likely to be a higher earner so would end up paying off his student loans so by taking out less, at least he'll pay it off sooner and not suffer as much interest. He is also contemplating paying off the loan a lot quicker by lump sums rather than just the basic 9% for ever and a day.

Student loans only really work for lower earners who are unlikely to pay much, if any, repayments. For "middle earners" who will eventually pay it off, they're far better paying it off by lump sums sooner to save interest.

I’d use the JISA
Student loans are a dodgy business IMO. My db borrowed a small amount (this was years ago) and it just never seemed to go down despite money being taken from his earnings for years. In the end, my mum (with a lot of difficulty) paid the balance off. The student loans people really didn’t want it to be paid off. Which says it all.

I would advise to take the loan in year one but potentially not in later years. The reason is that if they have a change of heart or struggle and want to restart year 1 of university they won't get funding a second time even if they didn't take the loan (found that one out the hard way) by year 2 they are more likely to stick with it.

My dd graduated last year and has already had to make significant payments as she hit the repayment threshold, it's also affected her mortgage prospects (she's worked through university and won non repayable bursaries so has a deposit ready)

Thank you all so very much! Some fabulous points here!
Just for clarity @taxguru and @AP5Diva there's no interest in plan 5 just the RPI, which is currently capped at below inflation. The student loan prior to this was RPI+3% if earnings high enough. So there’s no ‘interest’ per se but the percentage added (RPI) is intended to keep the amount borrowed in line with inflation. £15k today will be peanuts in 40 years so the RPI keeps it at the same value. I think I’ve understood that correctly.
Both her and I are getting ourselves tied in knots with this as RPI is usually more than inflation and earnings may not go up inline with inflation or RPI.
@gogohmm interesting how it’s affected her mortgage as there’s a lot of talk about how the loan doesn’t - but it’s an outgoing so of course it will.
I think the biggest issue for us both is that the terms are not set in stone. Who’s to say the gov won’t reduce the threshold even lower or add a percentage interest rate plus the RPI? So much can happen on 43 years!

She would be better saving her money for a house deposit. You'd be mad to pay it. The amount they pay back is so minimal each month she won't even notice it. B

There is interest and it will be the % of RPI (the highest of all inflation indexes). Do you know that mortgage interest is always around 1/3rd to 1/2 of RPI? RPI is at 13.35% this month but mortgages are at 5.35%.

Yet you’d never let any one convince you that there is no interest on your mortgage loan, would you? That you’re getting such an amazing deal at 13.35% interest that’s it’s just like zero interest? And meant to keep your house payment “in line with inflation”?

The various blogs saying that “in real terms there is no interest” are deceptive bollocks because they’ve forgotten that the interest is compound interest, not simple interest. So the fact that the interest rate is at RPI % does not really, mathematically speaking actually mean you never pay more than what the money was worth when you borrowed it after adjusting for inflation- you pay more. And what inflation? Tuition fees have been frozen for years which means ZERO inflation to the cost of Uni. The RPI is the inflation of retail goods, not education. It’s not even an applicable index as it does not measure the inflation of the cost of a Uni education. I have my suspicions these are written by those with a financial incentive.

And yes, the government can change the terms retrospectively. They can also sell the student loans to private debt collection companies. Which they have done with many thousands of loans already leading to the stress and legal battles of many graduates being pursued for money even after they’d paid off their loans.

@AP5Diva thank you for this! I had no idea that mortgage rates were 1/2 - 1/3 of RPI. Comparing it to a mortgage interest rate really helps put it into perspective, thank you.
I had no idea they could sell the loans to debt collection agencies. I’ll show DD this thread but I’m pretty sure she’ll want to use her JISA.

I’d take it out to start with.

Does it accrue from day 1? Or Day 1 after each 12 month period? I’m on the older plan and I can’t remember.

She sounds super tuned in to savings etc. Maybe offset the loan against decent returns on fixed 1/2/5 bonds?

I’d also want to see what happens if Labour get in, they might make some big changes. Probably won’t though - as they think it would piss off the current (z) and my generation (millennials). It honestly wouldn’t, these poor kids, saddled with 9% tax forever.

If you can make it work, stick some of that money into a LISA. You can put in £4k p.a. and the government adds an extra 25%!! (Two warnings: you can only use that money for house deposit or pension, and if DD is aiming to buy in London or the Home Counties, things might be different as you can't use LISA on properties over £450k.)

I didn't take a loan (I went just over ten years ago, and used money I earned on my gap year along with some scholarship money, fees being lower then) and am glad I didn't, even though half my course mates thought I was mad. I'm in a reasonable job but I don't think I'd have paid the loan off yet, so that would have been ten years of having student loan repayments taken out of my salary, and I'd still be paying it.

Personally I think it’s pointless taking some of the loan, her payments will still be the same regardless of how much she borrows, and due to interest she may not save that much anyway.

I would think she was better off saving the money for a house deposit. Once she’s bought a house she can always overpay her student loan if she wants. Especially if she’s able to save a bigger deposit her mortgage may be significantly lower.

I think as another pp says she should decide each year as she goes along. The student loan starts paying interest from day one do it is better to pay year 1/2 yourself if you can and take loan for year 3 than the opposite.
it would be an amazing start to her life to leave uni without student debt ( or just a small amount that she could clear in 5 years or so )
but I agree it does depend if she is likely to be a middle/ high earner
student fees for each year are due January time and accommodation fees usually Oct, Jan, may

@PhotoDad she got a LISA a few days ago as her older sister (apprenticeship not uni) got one after her first few pay checks. Who knows where they’ll live or if the threshold will increase to cover London/Home Counties prices but they’d need to be high earners to get mortgages of half a mil anyway. They still think the LISA is a good idea despite some of the disadvantages.

I’ve Just shown her the thread and your insights, thank you. It’s been incredibly helpful and has given her lots to think about. Maybe using her JISA is a good idea at least for the first year or so, depending how much it continues to grow (or not) / uni fees increase / ability to work and cost of living. Neither of us are up to speed with investing etc so we’re not sure about 2/3/5 bonds @ThankmelaterOkay - her JISA has transferred to Vanguards Life Strategy, which I think is ok.

But for a long time interest rates were fuck all. Only recently has the interest started racking (plan 1), as it’s BoE + 1%.

Mathematically speaking using the JISA can be seen as equivalent to getting a guaranteed investment return of RPI/7% which many investors would jump at.

Basically money earnt from investment growth versus loan debt.

Let’s say you had £1k in the JISA earning 7% and took £1k loan at 7%.
After 1 year your JISA is £1070 but you now also owe £1070 on the loan.

And that’s excluding the compounding of the interest over 40 years, so it’s a no-brainer to avoid the loan if possible. They don’t loan money out of the goodness of their hearts - they make lots more back from those that take decades to pay it off; same as mortgages.

The ball-park in the old days was that if you bought a house for £100k then you would be paying £100k in interest on top - then we had crazy low interest rates which changed things but now it’s going back to normal.

They used to illustrate overpayments with the example that if you doubled your 25-year mortgage payment from day one, it would be paid off in 7 years not 25. This was when normal interest rates given by bank savings accounts was 5%.

Another very interesting analysis @LucifersLight thank you. I think that’s the thing. You say they don’t give loans out if goodness of their hearts etc. But all we’ve heard for the last decade is that students hardly ever pay the full amount back (not sure that’s great for the tax payer but that’s another thread). Even with Plan 5 it’s thought that only 55% will repay in full. That’s quite a lot that won’t. No one has a crystal ball but I do expect governments will try to claw this back especially given they have 40 years to do so and are allowed to change the terms. This is making my brain hurt though!! I know some will argue that it’s not a ‘loan’ it’s a tax etc. and students don’t have set repayments like mortgages (Eg 9% of gross salary over £25k) and may not necessarily pay it off. She could finish her degree age 21 owe £50k ish, work for 10 years at circa £30-£40k only paying 9% of £5-£15k (let’s say highest amounts @ 40k salary & 15k over threshold) so pay off £13/14k over that decade, then decide to have kids, be a SAHM for a few years (pay nothing) then go back to work part time earning a lower salary (albeit wages increased so highly likely above threshold).
So maybe she would be best keeping the JISA for a house deposit? 🤷‍♀️

Just keep in mind when they say “repay in full” or “pay off their student debt” they mean paid what was initially borrowed plus all that interest. The vast majority will pay back more than the sum they initially borrowed. Lower earners may get equivalent of interest free loan they pay back over forty years. But very few but the poorest will pay back less than what they borrowed. It’s meant to be a safety net, not a marketing feature.

I think what would be ideal is to have the student debt paid off before having DC. And that isn’t going to happen without borrowing less than the full amount and topping up the 9% of wages over £25k with a few lump sum payments. If she graduates only £15-£20k in debt, that’s a car payment, and could literally be paid off in 4-5yrs with a bit of effort. But if she’s graduating with £50-£60k in debt the interest on that is going to accrue much faster than can be paid off in even 5-10yrs with a normal middle earning degree. It will be the 10 years of payments you envisage with the balanced owed not shifting down much, then years off as a SAHM not making any payments so the interest will balloon that balance again so by the time she returns to work and hits her highest earning years, she’s locked in to paying for what’s left of the full 40yr term.

I don’t think it’s quite as clear cut as it used to be but I think I’d still be inclined to take out the loan. The thing for me would be how quickly she’d otherwise be able to save a lump sum which might be a house deposit.

eg

in the following scenario she graduates at 21, does pretty well and has earnings of 2 years at £28k, 3 years at £32, 5 years at £40k

Regardless of whether she takes a loan of 10k or 20k payments would be around the following:

Y1-2= £270* 2 = £540
Y3-5 = £6303 = £1890
y5-10 = £1350 5= £6750

Hypothetically she has £27k in the isa or takes out a loan for £27k to cover feesz

In scenario 1 (loan). At the 10 year point she has paid 9180 in loan payments each month from salary but she has a lump sum of £27k which could be £40k if it grew at 4% a year.

In scenario 2 she wipes out the £27k but saves up the money she would have saved in loan payments so she has a lump sum of £9180.

The biggest thing for me is the value of having a lump sum: it could take her years to get anywhere near saving for it again. Yes
her debt would be rising but hopefully the payments would be affordable on a basis monthly

Thank you. I’d forgotten about interest accruing over any non-earning years @AP5Diva The fact it accrues from day one too. There’s very strong arguments for using her JISA
I know what you mean about the lump sum @Bunnycat101 but that 40 years and ability of govs to change terms is quite worrying, when it can be avoided. It would be lovely to have a lump sum
Lots for her to think about! But she’s still swaying towards using her JISA atm. No one has said anything that’s made either of us think that it’s a terrible idea.
Interestingly there doesn’t seem to be any online calculator for repayment of plan 5.

I'd make a list of worst case senarios and look at what would happen and what could mitigate them.

Eg what if she became disabled? Does the student loan get wiped (I know the old one did). Can she take out insurance to pay out in this case?

Does she have enough in the JISA to buy a house / flat? Buying in her uni town and renting a room or two to other students would give her income and a place to sell.

What if she leaves her course for any reason?

What is the impact on her credit rating of taking the loan/not taking the loan?