Should our daughter use inheritance for university or still take loans?

[YesIDoKnow]

Firstly. I just want to say I understand the absolute priviledge of this situation and we are eternally grateful for the position we are in as it has made life considerable easier in the short term. However, it is difficult to understand what to do for the best.

Our 2 DC inherited around £40k each from a relative. it was totally unexpected and more money than any of us have ever dealt with and skipped a generation. We have held this money for them till they were 18 and it has been mutually agreed that it was for university fees/maintenance.

Eldest (22) has the Plan 2 loan for tuition and some maintenance. With support from us and a a jon at college, she dipped into the inheritance relatively little, but has come out with a large debt (£30k+), high interest, but some savings. She is going on to use the money she didn't use as an undergraduate to pay for a (very expensive) masters. At 22, this is all up to her and I respect her decision not to take the additional graduate loan (she will be living at home rent free which will be our contribution). Just to say she has worked this entire last year and continued to save.

Youngest (18) has £50k now and is heading to uni. She does not want to get a loan at all - but will be Plan 5, I think. We will again make a contribution, but she will end up with no money and possibly some loan at the end of a four year degree.

So, I am struggling with what best to advise as the money is now hers to do as she wishes. I think she should still take the tuition loan (9k x 4(language degree) = £28k) and perhaps not take the maintenance loan (I think she will get 5k per annum so that would be an additional £20k). So she could end up with a loan of £28k and £22k savings or take all the loans and have £2k and a loan of £28k on graduating. We expect her to try and get a small job and work in holidays, as even £40 a week makes a massive difference.

There are many other possible combinations of course, but I just don't know what to advise her for the best. Any thoughts about this most wellcome. The Martin Lewis advice still seems to be take the loans. And then I guess we could advise her to pay off as much as she wants at the end?

But also is the eldest just stuck paying off the ever increasing interest on her plan 2 debt for the rest of time?

What have others done? Should they get financial advisors? Should they borrow or spend?

I'm not an expert in this but Martin Lewis is right. I would strongly be advising my child to take the loans. In fact, I did. My child has now graduated, is working, hasn't paid a penny of her student loan yet, and so still has her savings. Your daughter may well be glad of the security that having access to cash provides while a student or immediately afterwards. Say, for example, she wants to travel, or she wants to rent a flat with friends. These things all require money up front. None of us know what the future holds in terms of earnings or even of politics, but this way provides the most flexibilty, in my opinion.

Thinking of it as a loan is what makes it scary. But it's a misleading term really. It's not really a loan - it's more of a tax to be paid incrementally from future earnings, and that's the way to think of it.

How lovely of your relative to have thought of your children.

Keep the money.

Yes I have heard Martin Lewis say take the loan when a parent asked him if she should pay child's uni fees. He told them it would be better given to a house deposit etc.

Tell them to watch the Rebel Finance School on YouTube. It teaches financial skills and planning. It could completely equip and set them up for life done well.

It’s not what you asked, but FYI my DD just finished a joint honours with Spanish and the 3rd year (year abroad) you don’t pay tuition. She paid her home uni about £1500 - £2k to do the paperwork (which she took as tuition loan) but it’s not the full £9.5k.

She still needed to borrow maintenance loan for 4 years but 3 and a bit tuition fees

If your DC are likely to end up with highly paid careers then I’d advise using the money to fund the fees. If they are aiming for a lower paid/public sector type of career then I’d take the loans and invest the capital with a view to using it towards their first property purchase.

@annaspanner18 That is really helpful! I will check that out with the university (once we get results - I am a bit wary of jinxing things if I do them too soon!!)

@pippistrelle thank you. Yes it was really kind and totally unexpected. I am not sure she would have relised that it is actually an enormous gift to us as parents too, as giving it to the next generation meant there were no decisions to be made about how we allocated it for the family and at the same time while we have saved hard to be able to support them, it wasn't quite as hard as it might have been. I am grateful for her foresight and generosity daily!

So the consensus is Martin Lewis is likely right, as per, which chimes with my gut feeling. She can always decide to pay it off straight after the degree or use it as she wishes I guess, but who knows what she will need and want in four years time.

Agree with the others. Take the loan now for maximum flexibility and save or invest it. Best case is that the savings are worth more than the loan even with interest. Worst case is they are worth slightly less. The interest on a plan 5 loan is likely to be less than interest on a car loan for example and a bigger house deposit may mean better mortgage rates if there is a lower LTV.

Just to add that fees are closer to £10k than £9k now so allow for that in your calculations. Do check year abroad financing too eg lower fee but higher maintenance costs.

I thought Martin Lewis changed his advice on this. They will accrue lots of interest ls

My DD is very frugal and has quite a bit of money saved. She is unlikely to get a high paying job so has decided to take the maintenance loan next year (her last year) - partly because she gets a bursary tied to the SFE amount so if she didn’t take the loan she’d lose the ‘free’ money, and has put her money into an ISA. She is also due an inheritance of anywhere between £10-20k, and will put as much as she can into the ISA and the rest when she can next year. Then after she does get a job she can reassess - she may well do a masters down the line and will need money to support that.
I was of the opinion of why take the loans if you could afford not to. But if it’s borderline, or the money would go to further degrees, or the oft repeated ‘house deposit’, then maybe it’s sensible to take them.

He still says most people should take the loans, but that's probably bearing in mind that almost no-one can afford to give their DC a house deposit and pay their uni fees. Clearly he's one such person so it would be interesting to see what happens if his DD wants to go to university.

If you're in this fortunate position it's a harder decision as the risk is that if the graduate remains a lower earner for their entire career they'd be pay money they won't need to pay, although the number of people on plan 5 loans expected to repay is much higher and the monthly cost is higher due to lower repayment threshold.

For most plans, excluding plan 2 where the interest can be higher, you can view the interest as a proxy for inflation as it increases the amount owed by the rate of inflation.

Another consideration could be that if they're able to live at home for a few years after graduating, they could use that time to save a house deposit eg if they could save £1000 or so pm and get the LISA bonus, they could save £40k or more in 2-3 years if they're working in a typical graduate job even if it's not much more than NMW.

There is absolutely no point taking some but not all of the loan, unless she is really confident that she's going to be a very high earner and will get the debt paid off quickly. Repayments are based on income not amount of debt so someone who owes £30,000 pays exactly the same as they would if they owed £67,000 and most people on ordinary incomes will just pay it as if it was an extra band of income tax for their entire working life, potentially sometimes managing to pay it off a few years before retirement but mostly having a small amount written off at the end.

If she takes the maintenance loan but not the fee loan and assuming you earn enough that she is just getting the minimum loan, her debt would be approx £36.5k by the time she graduates and the interest added each month would be about £91. If at that point she walks straight into a job immediately after her course ends that is paying about £37,000pa, then her monthly repayments just about equal the interest she's being charged - any less than that and her debt will be growing not shrinking, and any delay even if just a few months (eg for travel or unpaid internships/work experience) of getting to that salary will have a significant impact on the size of the debt and push that breakeven salary target higher.

It's true that this is the cheapest money she'll ever be able to borrow but there's no point being wishy-washy and half-way about it. Either keep all the inheritance for a house deposit and go all in to take 100% of the loans on offer, or pour everything into avoiding the debt totally.

Wouldn't it be better used for deposit on a home? Small flat?

Both my DCs moved into well paying jobs after uni. We ignored Martin Lewis and prepaid their uni fees. It's the best decision we made.

The interest accrues from the day the loan starts so the loan will have increased before they've even graduated.

None of the money we paid is included in any inheritance tax calculations either.

My DSs GF is currently paying £800 pm off her student loan . This is affecting mortgage affordability calculations.

If you think your DC will get a high paying job, don't take the loan.

Can you pay down the loan at any point? Are there penalties attached for doing so?

Atm it is difficult to know what to do as there is pressure on the govt to do something about the Plan 2 loans. Can you imagine using savings etc to repay the loans and then they are forgiven? 😫

Take the loan. A lot of uni degrees don’t actually end up being an investment.

Entirely dependent on circumstances, but the risk is that it doesn't reduce the amount payable each month, which is dependent on salary alone.

If they're on the plan where most won't repay, it could be money paid for no reason. Eg if they owe £50k, you pay off £20k and then they are a low earner/out of work for most of the next 20 years until it's written off, they pay £100 pm for the next 20 years, which is £24k, there was no need for you to pay off the £20k now as it's not affected what they pay in the next 20 years until it's wiped, it's just that £6k has been wiped instead of £26k.

@Bjorkdidit - I suppose there must be a table of some sort to calculate at what salary it is worth paying down the loan. The thing is you need a crystal ball to see what career path is going to be taken. Ds’s friend, for example, works in AI for famous company. Ds works in the heritage sector so is not pulling in megabucks; in fact hardly any bucks! Dn went from Masters to sahm as she married “well” in Jane Austen terms…

I know Moneysaving Expert had a table years ago, but that was for an earlier plan and probably didn't account for the sort of inflation we saw a few years ago.

But in your examples, assuming your DS friend earns a lot, he'd pay off quickly, but with high monthly payments, so pay not much interest.

Your DS may pay little or nothing, I've seen graduate museum jobs that pay NMW more or less. DN would also pay nothing unless she starts working again when her DC are older or if her marriage ends and needs her own income.

If they had another friend who became a middle earning profession like a nurse or a teacher, they'd probably pay the most of all because they pay for much longer so more interest. But in the absence of wealthy parents, they'd probably be most in need of a house deposit especially if they're in a higher cost area as otherwise will struggle with income multiples to get a mortgage. So that's probably the greatest inequality that you have lower earning essential professions paying more back than high paid private sector workers.

So lots of unknowns so in many cases, it's hard to know what's best.

Pay the fees and leave uni free of debt. It massively increases personal motivation and the interest added to the debt is terrifying to a job seeking 21yo. it is not just sums for most, it is mental health, emotional well being and motivation.
The plan 2 loans are awful and I think many were mis-sold them - they did a Money Box on this on the BBC recently. They make young people anxious and depressed when they are meant to be striding out into life.

I was advised by my parents to take a loan when I want to uni in early 2000s. I didn't really need it as I loved at home, borrowed about £4.5 in total. It did end up going towards a deposit for our shared ownership flat (met DH at college). However we could have saved that amount if we moved out a year later. I'm in my 40s now, due to lower paying jobs, maternity leave etc I owe £8k. I worked out I was paying about £1k a year but with the interest added it would never clear so I'd be paying that until it got written off at 65. I've been hitting it hard over the last few years and I'm going to pay it off in the next few years, estimate costing me around 10k rather than paying £25k and never clearing it. I just trusted my parents opinion at the time and really wish I hadn't. Oh and I don't work in a career related to my degree either!

I have a DC that will be getting to uni age soon and does want to go, I've made them aware how much it will cost etc. They will likely have to get loans as they will need a degree for their chosen career. They are planning to take a year out to save up to hopefully reduce the amount they need to borrow.

Thanks for all your comments and thoughts on this. It still feels inpossible. Making a decision based on future earnings seems like madness, especially in the current climate, but neither DD is currently on any professional track that would might make them a lot of money. They are much more likely to go into public or third sector organisations I suspect. But how can we know? I am pretty certain they are not going to be lawyers, in finance or tech, but never say never.

I do wonder if their shouldn't be a class action suit about Plan 2, it's the worst of all worlds

I believe that graduates only start paying back their student loans once they are working & earn over 25k (or whatever the level is set to, suggest find out exactly) plus interest.

Therefore someone who never earns 25k, never pays their loan.

Therefore it would probably be better to put most of the inheritance into a LISA to buy property in the future. Spend the rest whilst at uni

You really need someone to crunch the numbers.

I was given advice in the past.
It is a rare event to be given a lump sum of money. Therefore it should be invested wisely.

Good advice here.
We weren’t able to prepay fees but thankfully for other reasons DS only has a small loan balance. This is particularly important as DS is now paying a higher rate of interest on his student loan than on his mortgage due to being a higher rate taxpayer.

We all realised he would pay back more as he earned more but didn’t realise his whole balance would have higher interest charged on it due to his earnings. I believe it is plan 2, he went to uni in Sept 2022.