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.

DS1 has thoroughly looked into the loans and has opted to stay at home for uni, we will cover the fees and he has a part time job for anything else he needs.

the student loans just seem like a money maker for the government now in the form of an extra tax for life.

the way it works not has complicated changed the university experience from when I went!

This. As someone with both a Plan 2 loan, postgraduate loan and now a new degree as a mature student I would never take the loans if possible. I scrape together the tuition myself and live at home (my home with husband obviously not parents) and it is just like paying for nursery - around £770 a month. If many new parents can do it why not older parents? Obviously some cannot afford that but if you can, do!

Why? He works in finance, so should understand the concept of a loan, and had a high income. So why was it reasonable to resent repaying his student loan?

the student loans just seem like a money maker for the government now in the form of an extra tax for life.

Student loans are a HUGE cost to the taxpayer. The majority will never be repaid so the debt has to be written off from the public purse. The current outstanding student loan debt sits at £292 billion.

I'd discuss with the gift giver that even if they pay the fees your child will still have loans for maintenance and the way the repayments work they will be paying the same amount each month however much they owe. Paying fees feels like throwing away money for no benefit, either the entire cost needs to be covered or none of it and find another use for the gift.

If they are still taking out a loan for living costs all the disadvantages of the loan remain (10% graduate tax for 40 years)

Unless they earn enough to pay it off more quickly, then it might be 10% graduate tax for the first 10/15 years of their working life then no more.

😂

So would you say better to cover the costs of say rent and bills to the same amount as the fees and take the loan for the fees? I hadn’t thought about this perspective so would like to know more why that would be a better idea

Some of the comments relate to plan 2 loans which had different terms including RPI+up to 3% interest. Current loans are RPI only but repayment starts at full time minimum wage and continues for up to 40 years. It is possible to save at a higher interest rate at the moment and the interest rate is less than a commercial loan or mortgage.

If there will be enough money given to cover fees plus living costs which can be higher than the maximum loan, buying a car, house deposit then it often makes sense to take the loans and save the money. It just gives more flexibility and you can pay off at any time.

Taking a smaller loan reduces the interest added so the loan may be off faster and there is less interest compounded over time. If they work in a low paid job, take time off to be a carer, have an accident and are unable to work then paying upfront is wasted money.

There are too many variables so everyone has to make a decision based on their own personal situation. It depends too on the motivation of the gift giver e.g. save IHT, avoid debt. For IHT, paying the university directly may be treated differently to paying your DC so worth doing more research.

Also consider sibling fairness and possible changes made by the current or future governments. If you're a few years off then we may be on Plan 6.

This is good advice IMO.

As far as I can see it wouldn’t make a difference.

Other than to note that you do not have to provide info re parental income for the tuition fee loan and the “basic” (~£5k) maintenance loan.

If you want more than the basic maintenance loan you’ll need to declare allsorts regarding parental income etc.

I’m the mother of a Y12/17 yo. I’ve been thinking about this a lot recently, as DH & I and FiL have been paying into a CTF/ISA since DS was born and he’ll have the current equivalent of 4 years fees when he’s 18. (Similar for DD, 3 years younger).

Student finance is changing for the next intake, but the universities don’t yet know how.
Interest rates might be (currently 6% ) substantial, and start from the first day of your first year.
We could afford to pay DS’s rent in some places, but that would be instead of pension AVCs. I’d be 60 by the time he graduates, tbh, I’d rather pay the AVCs.

Doesn't matter which loan they have and which the relative chooses to pay if they have any loan at all they will have to pay the same 9% of their salary over minimum wage.

If you have a household income above ~£25K you are expected to contribute to their living costs, if you have a household income over ~£65K your child will only get the minimum maintenance loan of ~£5K. So depending how much you and your DH earn it may be that your relative pays the fees, you pay the bulk of the maintenance and the only get a loan of ~£15K. But if they are on a low salary then they will still be paying 9% of their salary over minimum wage for abig chunk of their career. In which case I'd be tempted to pay the extra £5K a year to avoid them having any loan at all. But that depends if you can afford that.

@Citygirlrurallife Monthly payments are NOT based on the size of loan or what element the loan covers. He could borrow £30,000 or £60,000 and the monthly repayment is the same. Martin Lewis explains this. What will make the difference is how quickly it’s paid off. Quicker with a highly paid job. 40 years with a lowish paid job but never will pay it off. So it’s free money!

Then think - what else could we do with the money? Invest it? House deposit? Is he going to be a high earner? What is the likely return on the degree? If he’s a low earner, how will he save for a deposit? You’ve had it and spent it!

But I guess this is where the conversation with the relative comes in because I do also believe that if the gift is being given with the intention for DC to have a financial barrier free further education then probably that needs to be respected? IE I don’t know how comfortable I’d feel saying thanks for the offer but can you give them a house deposit instead? But we’re close enough we’ll discuss properly

In fairness he worked as an IT analyst but for an investment bank 😃

I think there is something tremendous about being able to not take on debt for education. It lifts a huge pressure away.
Let the relative pay for what they wanted to pay for, it's a wonderful gift. .

@Citygirlrurallife So is the gift paying for tuition fees or fees and living costs? If just fees, great, but he’s not debt free if he takes out the maintenance loan and will still pay based on income.

I do know a family where this happened via a trust fund. 2 in the family went to uni and the trust paid the fees. Third dc didn’t go and trust was altered so it became a house deposit. Guess who is better off? Earns well enough but didn’t need to save. Obviously your relative might be dead set on education like the trust donor, and that’s fair enough, but do you have other savings for dc? What are job prospects? I can quite see you don’t want to upset the donor though.

Depends on the relationship of the gift giver, but paying for education can be a part of IHT planning. I think OP would need to clarify with the relative whether this was a factor.

@SabrinaThwaite Giving is part of IHT strategy. As long as you live for 7 years after the gift. Give as much as you like. The use is besides the point with the 7 year rule. Education trusts are another matter. They provide additional IHT exemptions. The donor has presumably done their homework, £3000 a year is also a IHT exempt gift.

The interest rate is a disgrace. This is about 2.5x the rate of inflation.

How has the government allowed this to happen?!

Only parental gifts for education are IHT exempt without any additional requirements. As we don’t know who is offering the money for fees nobody knows that they will live for seven years after making the gift. And gifting £3000 per year (or £6000 for a married couple) under the current rules won’t cover annual fees.

As the relative is offering to gift for educational purposes then it’s something that needs to be considered.

We don’t know that the donor has done their homework given that the OP is asking whether they can invest the money and take the loan instead.

Thanks again for replies. Relative is very clued up but as I said we’ve only had an initial discussion (part of a wider one about their finances in general hence not in great details), those conversations are to come for sure, and as there are several relatives they are making this offer to which would span potentially decades I’m sure they’ll be thinking about that impacts each child differently - especially considering IHT which hopefully won’t be an issue any time soon but yeah you can never know.

The original question was really based on a hypothetical at the moment as I assumed better not to have the debt and DH assumed better to invest the loan, all actual details we’ll be hashing out between the 4 of us but all the opinions and information has been super helpful. Of course we’ll all do our research to make sure the gift achieves what they are hoping for, what the want it to achieve as ultimately if a gift is given for a specific purpose I think that should be respected. But also to make sure it sets DC up with the best start all round.

@Citygirlrurallife It sounds like the relative should probably set up a family trust if more than your dc involved. Then it’s out if the estate and sorted. Plus you can get the variation if dc don’t go to university. Or is relative thinking dc will get £0 if they don’t go to university? That could be harsh.