Should DC take the student loan if fees are gifted?

[Citygirlrurallife]

We might be in the very fortunate position to have a relative gift the cost of university fees for D.C. in the event this possibly happens, my feeling is great they don’t get the loan for that (we’d still need loan to help pay for accommodation) that’s a huge chunk of debt they don’t have. DH is of the opinion that DC still take the loan as the interest rates are low and then either invest it so it makes more money than the interest as they pay it back and then use it towards a deposit on a home as the interest rate is lower than what a mortgage would be

I just think not having the debt at all is a better idea - thoughts?

all hypothetical at the moment and a few years off.

I assume the person giving the loan is close to the student and is doing so in order for them to have the best financial start in life and not be saddled with huge debt so I don't understand why people are surprised they would be included in the discussion or annoyed if it is suggested the loan is used in a different way than intended. The person giving the loan may not even understand how the student fees and maintenance loans work so even more reason to bring them into the discussion.

Don’t do it! The terms and situation are very different now to what it once was (which wasn’t great then, to be honest).

Plan 5 (most student loans taken out now) are paid when you earn £25k (9% is paid back over this) and interest which applies from day 1. It doesn’t get written off for 40 years. Think about how that £30k for tuition can grow in that time, it will be another tax around their neck their whole working life.

I am on plan 1 which is bad enough, I took out a smaller loan but I’ll still never pay it off due to the interest. But mine is written off 25 years after graduation at least.

It would perhaps only be worth doing if you anticipate your DC will have a low paying job their whole life, so therefore would never earn enough to pay it back anyway. But if you think they will 1. Earn more than minimum wage and 2. Be working for their whole working life it really is a burden. I wouldn’t bother going to university at all if I was a young person today.

I've been paying my loans for years, and I will be paying them until they're written off because the interest charge is more than my payments so the balance just keeps going up, my colleagues are in the same boat. I wouldn't take the loan in your DC's position.

Like others have said the loans are completely different from when you were a student OP. With interest rates as they are it’s probably impossible to be better off taking the loan and investing the amount instead. Particularly if the money is being given for this purpose, most straightforward thing is just to use it for this.

Im saving now for my 2 primary age kids’ uni fees.

Yes, so would I, if I had offered the gift as a way to avoid having a loan.

In a way it can be worse with the new student loans if the student has a medium to low earning job. If you earn above the threshold of 25k you’ll be paying 9% of that difference as a tax, effectively. But because you’re paying it off slowly the interest accumulates and accumulates and the amount you eventually have to pay is far more than if you were high earning and your 9% enabled you to pay it off a lot faster.

https://www.studentloanrepaymentcalc.co.uk/
This is a good calculator - say if you just had £30k of the tuition fees loan (very approx) to pay off, and you’re earning £28k. You would eventually pay it off in just under 40 years, and you’d have paid £67k in total (your original 30k and 37k interest).

If you earn a lot less than that, you might not have to pay anything back for years, but as soon as you go above the threshold you’ll be paying 9% of that difference till 40 years have elapsed.

If you earn a lot more, eg 45k after graduation, you could pay the full lot back in under 15 years, and because you’ve paid it off more quickly, the total amount of interest you also have to pay off is much less as it’s not had time to accumulate. So at the end of 15 years you’d have paid 30k of original loan back and £8.5k of interest on top. Far less over your working life than someone on a lower income but who still has to pay it back and won’t just get the whole lot written off.

The interest rates are huge now.

If you could scrape together enough that, with them getting a part time job, they would need no loans at all I'd say take no loans. Live life free of the tax.

If you need to get maintenance loans - £10K a year for 3 years say. Thats £30K of debt on 3.2% interest. Which you repay once you earn £25K and will be 9% of your income over that amount.

3.2% on 30K is almost 1K.
As you pay off 9% of salary once you earn 25K you'd need to earn 12K more than 25K to cover the interest. And the student loan repayment is calculated after pension has been salary sacrificed etc so realistically unless your kids is walking into a £40K a year job immediately after graduating, they won't be even covering the interest. They might meet £40K after a few years but then the loan is even higher because of the accumulated interest and they still aren't covering it. That is how it becomes a 'tax' they pay more of when doing well.

So if you'll need to take the maintainance loan anyway, take both, invest the money, and be £30K better off for having that lifetime 'tax'.

I'm not sure you have a clear picture of the loan - my son's had already significantly increased due to interest even before he graduated.

I think you can pay back the loans with lump sums so there may be something possible with investing and then paying them back early on, but I’ve not looked into that at all yet.

As pp said the student finance deadlines for this year are past, but I think you can still apply past this deadline for this year - but it’s not guaranteed that finance would be in place.

Only a full discussion with your relative and your acvountant will offer you the correct answer. Being savvy with the gift is aresponsible reaction.

Usually I'm firmly in the "don't take the loan unless you need to" camp; it will be very difficult in the near future, with projected interest rates and projected global economics, to make enough from investment, after any tax if the investments are not entirely in ISAs, to reliably exceed the loan + interest.

However the really key thing in this particular circumstance is that the OP's DC will be taking a maintenance loan anyway. Once you have student debt, any student debt, your tax is 9% higher (on earnings over the threshold). It's not 15% higher for those with high debt and 5% higher for those with low debt. 9% for anyone. Even with low debt it might be a long time before the loan is paid off and meantime the DC has had exactly the same tax hit as someone who had taken full loans for everything.

Work it through super-carefully OP; project different earnings rates and conservative and optimistic investment rates and look at all the possibilities.

It sounds like you really have very little understanding of the current loan situation which is awful. Graduates are now liable for 40 years. Interest rates are awful now too.

I really hope the government crack down on this asap.

Whilst I agree with your summary of repaying the loan, what you are missing is in this case the lump sum is ‘working’ too. So the idea is that it is invested somewhere that will acquire interest at a faster rate than the loan acquires interest so the loan can be paid off with the lump sum and there is still a profit. This likely involves some risk in order to access higher rates of interest for the lump sum (which will also be subject to tax). Another alternative is it might offer a lower interest rate than a mortgage for part of the sums for buying a house, and a debt that doesn’t impact credit score if you lose your job so cannot repay (as you won’t need to).

I think given the current interest rates on student loans, the idea of trying to invest to make money is probably a rather risky one.

How old are you kids? You will only know the details of the loan in the last year or so before going to uni so there is no point thinking about it until then.
Dont forget to think about the value of having no debt from a physiological point of view. We paid for our kids knowing that it wasn’t automatically the correct from financial point of view but did so as we had spare cash. The kids really valued that fact they had no loans.
Rexteospectively from a Financal point of view it looks like ot was the right decision anyway but we didn’t know that at the time as we didn’t know how much they would earn. They all would have had different t loan plans too so that makes it tricky to work out.
You need to look at the whole picture. Will you be able to help them with deposits anyway? Do they know what type of career they want.

Probably the bigger risk in taking out the full loan though is that it will just be spent, so the donor is effectively just supporting spending on whatever - life, drinking, better accommodation, travel, clothes…. Maybe frivolously or maybe because low budget living is hard and they couldn’t find a part time job. But not what the donor would have had in mind.

I agree and think if you can not borrow money then don't, in general. We have a massive issue with loans in this country and it isn't something I want my kids to have hanging over them for life.

I'm not sure that's correct, having had a play around with the calculator it is telling me that a 30k plan 5 loan would be written off eventually on a 45k salary.

I’m no expert, just played with the calculator too with no changing the basic settings, but it does show it being paid off with 45k salary? (Photos attached whenever they show up…)

It is also worth noting the loans don't affect girls and boys in the same way - boys tend to get salary raises in late 20's while women start considering families. The time spent out of work directly affects the returning salary as well as the repayment and pension effects.

PIL have recently gifted our 3DC money to potentially pay off student loans. DS1 hasn’t (with the agreement of PIL) because he’s likely to buy a house in the next 12 months and the money will be useful for the deposit.

DD has paid off her loans. She’s a medical student and likely to be a high earner in future years.

DS2 has no loans as he’s at college in the US on a scholarship.

Three completely different scenarios requiring different responses.

A big factor in PIL’s reasoning was potential inheritance tax liability.

I did this with my student loan 25 years ago when the interest rates were something like 2%.

There is no way I’d be taking the loan to invest now. It sounds like your Dh isn’t up to date at all.

Indeed this.

As well, the loans are a bloody lifelong thing at the moment. Very hard to pay down. Your DH thinks he’s in the 1990s.

Not to mention the lack of jobs going forward being a real threat to the first rung of employment. A lot of kids are graduating and unable to work at all already, so it won't be better in a few years but likely worse.

And if you are sitting with the loan lump sum you won’t be entitled to benefits.

Yes, this. The interest rate on student loans is currently high. I doubt it will go down! DS also has no control over how much of his salary is taken each month - I understand it’s a percentage of his earnings, which vary due to commission, bonuses etc.