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?

Bear in mind the terms will be different for your dc vs the Plan 2 loans the OP is talking about. But chances are, as with plan 2, the contract says the terms can change - the repayment threshold and interest rate aren’t known up front, or even the term could be changed.

Whether paying off the loan (or not taking one) make sense depends on the family finances and the child(ren)s likely earnings profile.

Definitely worth paying it off if you’re a high earner. I know everyone says it’s just a graduate tax, but why pay 3 x the amount and have it hanging over you when you know you’ll earn enough to have to repay it all. The interest is high, not sure if everyone realises how much they end up repaying over the years.

I think a bit differently to most on MN these days. I think student loans have become an absolute swizz and are going the way of the US. The government can change the terms at any time, the amount of interest is eye watering and women are hugely discriminated against whilst on Mat leave or p/t as interest still accrues.

Add to that I’m aware of family members who’ve been gifted heft heft deposits remortgaging their house and spending it on things they really can’t afford.

I’m 42 and still paying mine

Can you afford it? If you're thinking ahead of the forthcoming IHT changes next year and want to gift money, why not?

Figures wise, if your investments are outperforming the 6.2% interest currently incurred by Plan 2 (The interest rate is usually set on 1 September each year, based on the Retail Price Index of the previous March), it makes sense to keep the loans.

It's not all about finance though - similar argument with paying off your mortgage or not. We chose to pay off our mortgage a decade ago whereas we would have had a better return if we put more into our pensions or invested in BTL's in the early 2000's. Past redundancies and minor health issues meant that we chose to prioritise paying off our mortgage.

DS is graduating this year too. He's fortunate to have the option of considering paying off his Plan 2 student loans due to sufficent funds in his ISA.

Yes but the difficulty is these days, the fucking government think they can change the rules whenever it suits, and years after you take out the “loan”.

(So I think if you can pay it off you should)

one thing I’m worrying about is that if you help your dc and they take a lower loan or no loan, the government then turns around in the next few years and says, let’s replace it all with a grad tax of 9 percent. So effectively you pay twice, but that’s ok because, you have broad shoulders.

I’d absolutely prioritize the long term savings for a house deposit over loan repayment, because it is less risky.

do we think the gov is going to exempt people whose parents paid their loans off from the grad tax system? I’m not sure I trust that. It you can trust that a house is a more secure use of funds.

No, not all all! There are many student loan calculators available and it's worth having a look to see why it's in the news so much now. I'm not against paying for university education but dd will borrow approx 45k (some students will need to borrow 60k), if she walks into a 35k job immediately then she will repay £75 a month for 40 years and still not clear her debt, the government will write the rest off. If she earns 55k then her take home pay is £3540 monthly (without any pension contributions) but her loan repayment will be £225 per month

I appreciate 55k will be a better income than some people get but the loan but the repayments are large and the interest is so high that many will never pay off their loan

‘I took out a Sainsbury’s loan to clear my student debt. It was cheaper’

www.thetimes.com/article/7d059444-683e-479d-9519-cd4b236f9ffa?shareToken=f9171f9f25034c7e2168d0ff8fa99e0e

The good thing about a student loan though is the monthly repayment rises and falls depending on your salary. If you take out a loan from somewhere like Sainsbury's it's a fixed monthly payment, even if you become unemployed

Good on him! Me and DP are not much older than him, earning a lot more and have huuuuuuge debts!

@LondonCheesecake agree - but how did we ever come up with a govt loans for education system where the interest is more than commercial loans…it’s been a dismal failure on all measures except that when TF were floated people said it would deter uni entrance and that hasn’t happened. Although perhaps we are at a tipping point on numbers now.

@Whereistheejectbutton Because 50% plus of the loans have never been repaid? They are not mortgages or bank loans that must be paid off are they? We, the taxpayer, underwrites the huge amount loaned - circa £250 billion fairly soon. What commercial loan could you get with a 39-40 year pay back time based solely on your earnings? Nowhere! Absolutely nowhere. This makes them special. I don’t like the recent changes but we are addicted to university and someone has to pay.

If you are very wealthy then why wouldn’t you. It’s so circumstantial. My friend is about to help her child with a house deposit. She has been diagnosed with a disease that is life limiting. But it’s entirely her decision however misguided I think she is as now she is not able to retire early. He has an inheritance already and is in a better position than most.

DH and I have started to chat about how much we will assist DS with a house deposit. He was thinking a much lower amount than me.

Hmm - I can’t think a system operating 5 plans where 4 are RPI and 1 is RPI plus 3 pc will continue. As you say it’s an across the board failure and sue the govt will tinker further. In fact a write off and grad tax you can see could happen under a new labour leader in this parliament.

The issue is that the tax could end up being several times what a settlement could be now. And a bigger deposit will be needed for house purchase with the loan interest as a cost etc, so yes might make sense to repay.

I’d have no faith that a left of centre party wouldn’t impose the grad tax based on degree regardless of loan repayment status. I hope I’m wrong.

Are 50% not repaid because of the huge interest rates applied? As I said, I accept university needs to be paid for but perhaps a fairer system would be that as you leave university the govt look at what's owed and then add a flat tax, even a high one of 40% would mean my DD would know she owed £63000 (45000 debt + 18000 interest) and she could start repaying, knowing her debt wouldn't get any bigger. There would be an incentive to clear it then

@LondonCheesecake Not repaying goes back decades. Lowish pay, part time working and the 30 year period all have to be factored in. The high interest rate adds to the issues but it’s to claw back some of the vast amount owed. It’s not helping government borrowing or the tax payer. We want too many living away from home and need a reset. The interest rates haven’t all been awful but grad pay has stagnated as has growth. So we have a problem. Then factor in grad unemployment and it’s a perfect storm. I think it’s wrong to keep altering interest but we need to make changes.

That has always been in the UK student loan terms and conditions. It’s been pointed out by many critics of Martin Lewis when he was pushing them as the best thing ever. I think it’s a bit ironic he has now flipped a 180 and is criticising the same student loan plan he aggressively sold for over a decade.

I paid off my daughter’s loan a couple of years ago. I hadn’t realised how high the interest rate was, and was concerned that it would take her years to pay off. She lives overseas and has never shown any interest in buying a property, so it was far better for her for me to pay off her loan.

Maybe, I don’t know, but now they are actioning it, and upping the interest. It should be illegal to do that after the fact. Those ministers contracted out a bloody good business, didn’t they? Charge high interest, and put the rate up when you fancy. The t and c should never have been agreed.

That is unfair. 10 years ago the Conservative party proposed freezing the repayment threshold (in effect the same policy that Rachel Reeves has proposed now). Martin Lewis was at the forefront of the campaign against this proposal as it would have retrospectively changed the terms of the loan agreement after students had signed up to them.- something that no commercial lender would be allowed to do. It was thanks yo his campaigning that the government at the time then thought again and didn't go ahead with the proposal and it is why he is campaigning so hard again now that the Labour government has announced similar proposals!