Should we pay off DC's student loans?

[Woollyguru]

I'm having a really hard time trying to work out whether it's worth doing.

DD is graduating this year. She's on plan 2 where the threshold to repay starts at £27k approx, and it will be written off after 30 years. She's got the full tuition fee loan and the min maintenance. So total loan approx £42k

She has a job starting in September which pays £25k in year one rising to £36k in year 2.

She needs to do further training but after that's completed she can reasonably expect to earn min £50kpa which will go up with experience.

I know the repayments will be taken into account when applying for a mortgage.

It's impossible to know her career trajectory and how much she might end up paying back before it's written off. I know in general if you are going to be a high earner and likely to pay it off it's better to pay it off sooner and save on interest.

But the money might be better off going to towards a house deposit.

Has anyone done the maths on this?

It's a graduate tax. Just let them pay it.

It depends on your financial circumstances. If you could pay it off, and help with a house deposit, then do that. If it's pay it off, or the house deposit, then do the house deposit.

Although it is a graduate tax, it will drag on take-home pay for years, and she will likely pay more in interest than the loan itself. So I wouldn't dismiss paying it off.

House deposit every time

Yes this

I think it is complicated and will depend on their earnings trajectory, which is hard to predict at this point.

Our strategy is to wait a few more years unitl their situation is clearer and then let them decide for themselves. We plan to give them a lump sum and let them choose whether to use it to pay student loans or put towards a house.

Also, my current best guess is that one of my kids might do better paying off the loans and the other not. But there is no way I am going to make those different choices for them!

Do not pay off the student loan. Absolutely pointless. It’s a graduate tax. House deposit every time..!

A house deposit will make a far greater difference to her quality of life in the longterm.

The money we paid while they were going to university we continued to pay towards their student loans. $75 per week for food/ $5K per year towards tuition and soon enough all three student loans were paid off by us. We were in our prime well paying jobs and low expenses at that stage.
Home ownership, we only chipped in $5-15K depending on need.
I’m debt adverse so I’m pleased I helped. Now eagerly looking forward to helping grandkids. Happy to pay tuition costs for all three.

Very much agree. Renting privately in the current climate is generally grim, and rents are only going in one direction.

DS(25) has just paid his off, but he is earning well (£80k) in the city and also has some money for a house deposit due to inheritance.

At his salary level it was a no brainer as he would have ended up paying a sum equal to about 3x the loan within the 30 years.

Did he overpay ?

Just that at 25 he's only been in repayment mode for four years max
and 9% of £80k less the free amount is £4770 a year
when tuition fees are £9000 a year and interest was being added since he started uni.

Most kids graduate with around £60k of debt now
which is VERY hard to repay

I'm not sure what you mean by did he overpay?

But his loan was smaller, as was only for fees (not maintenance) so about £30k, which makes it even more likely that he would have paid it all + a huge wodge of interest within the 30 year period.

A 30k loan would take at least ten years to pay off even before interest as the 9% is standard
to have paid it off by 25 implies he put a lump sum towards it

which is what everybody on the thread has said not to do

It would serve them much, much better to use the money as a house deposit.

Oh sorry, yes, I didn't understand what you meant!

When I said he's just paid his off I meant he has just cleared the debt with a lump sum payment.
He is in a situation where it really does make sense to pay it off with a lump sum as otherwise he would have ended up paying the maximum interest within the 30 year time frame.
And as I said earlier, he is also fortunate to have a lump sum put aside for a house deposit.

His is one of the 'outlier' cases where overpaying/paying it off actually makes sense. Yes, he's still gambling on things like earning well for a lot of his career, but he's modelled it and it's a risk he's willing to take.

We’ll wait - the dc are working and living at home - no rent and saving about £12k a year, they won’t move out in the next 3-4 years, so they should have the guts of a good deposit saved- I’d rather they felt like they’d saved for it, I don’t think it’s the same for paying off your student loan. Anyway until we have a lump sum to pay off the loan - which won’t be for another 4 years anyway, so we won’t make that decision just yet.

We're a few years off DC going to uni so always read threads like this. Although they'll get written off after 30 years surely 30 years of repayments will potentially equal far more than the original loan amount and interest (9 percent someone said unthread?!). Plus it's a millstone around their necks, another monthly expense for 30 years sounds awful.

How much would the monthly repayments be? It seems ludicrous that someone would be paying off a student loan for so many years! What exactly is meant by a graduate tax btw?

A future government might wipe out the debts.

OP is Plan 2, current students will be Plan 5. Plan 2 is 30 year write off and interest rate is RPI+3%. Plan 5 is 40 year write off and interest rate is RPI.

RPI is currently 4.2%

So yes, if Plan 2 and going to be a high earner it may be a good idea to pay it off, but that depends on what you think RPI is going to be in the future. A house deposit “might” be a btter idea.

@IfWhippetsRuledTheWorld When people say 9%, they are talking about the amount that someone pays back. If the threshold is £25k and the person earns £26k then the person pays 9% of £1k, i.e. £90 a year. That is £90 a year even if they have £150k of student loan debt. So many people don’t understand this.

In my opinion Plan 5 is fairer than Plan 2 due to the lower interest rate, despite it being a 40 year write off.

That said, we now know we can’t trust the government to stick to the terms of any contract and I would not be surprised if the thresholds are frozen permanently at around the minimum wage level to make more people pay back more.

If I was unsure if my child would pay the loan off before it is written off, then I would be inclined to invest the equivalent amount for them in an ISA, i.e. hedge until things were clearer. i.e. if they had £45k debt and I had £45k to hand I would invest or save that £45k for them. Then they could choose at a later date to either pay off the loan or use it for a house deposit.

VoiceFromThePit Thank you for clarifying about the interest.

Sadly I can't see any future government wiping loans out.

So if a graduate earned £50k for 40 years, at 4.2 percent they'd repay £42k in total, regardless of their loan amount? A good deal if they £70k of debt, not so great if they only had £30k of debt.

It seems such a minefield, surely it's better to pay it off if affordable rather than have a constant outgoing for 40 years and rely on the future governments not moving the goalposts?

If you have money I would say put it towards a deposit as that’s much harder to get together. Rent so expensive. If they can get a 2 bed flat they can rent out the 2nd bedroom.