Worth it to avoid taking out third year of student loan?

[Grottoscraper]

DD has just finished first year university. Currently on student loan scheme of 9K+ for fees and another 9K+ maximum maintenance loan. So would finish degree with c.60K debt, plus interest.

Has had some money come in from unexpected sources, we sat down and looked at her expenses over the year, and worked out that she could choose to not take out the loan in her third year.

This would mean graduating with 40K debt rather than 60K. I know there is a received wisdom (Martin Lewis etc.) that the amount doesn't actually matter because the repayments are based on income and most people will never pay it all back. OTOH I worry about this enormous burden of debt we're saddling this generation with, how its going to affect their ability to get on and live, raise a family etc. when they DO get into proper jobs and own houses. And the fact that while the interest on the current scheme is capped at the rate of inflation, the govt could change that any time they want and start charging an interest rate that makes it all balloon.

Owing 40K rather than 60 just seems like a significant hedge to keep it at a level that could conceivably be paid off if that's what's best, either via inheritance (will happen, but not riches) or gradually via earnings.

Thoughts?

Take the loan for the 3rd year. Put the sum of unexpected money in S+S ISA. Growth on the investment is extremely likely to exceed interest on the student loan over a 10 year + timeframe.

In the future, the adult DC can decide to use the investment for house deposit, pay down/off student loan, leave it alone to continue to grow.

I think now she’s got £40k debt then going up to £60k won’t make any difference. £40k is a huge amount that unless she becomes a very high earner she likely won’t pay back, and she’ll be paying the monthly payments until she’s 50+. I’d take the 3rd year loans and use the money towards a house deposit for her instead.

The student loan system is an absurdly complicated and expensive means of justifying a graduate tax.

The amount of debt, however large it seems, simply doesn't matter. All that she will repay is the percentage charged on income over the threshold.

If she's come into cash she's better of putting it on deposit at the best rate possible towards a deposit on a house.

Whether she has £40k or £60k won't make a difference to her monthly payments if the govt changes the interest rates again.
I would take the loan and keep the money invested in a s& s ISA for growth

For plan 5 loans people will pay back a lot more and a lot more will pay it all back due to the lower starting threshold and longer write off period. Hardly anyone seems to have noticed this.

I agree with the suggestion of investing it to offset the cost and give her more options later.

I think the advice to not take a loan is more appropriate if you're expecting to be a middle earner, eg around £40-60k at today's prices, as you'd pay more interest and you'd not need the money for a house deposit either because you have other money or think you'll never buy a house. Lower earners won't pay back all the loan, let alone interest and higher earners will pay it back quickly and have more money to save for a deposit.

Does she plan to be a museum curator or a lawyer?

Also perhaps more young adults should consider whether its feasible to return to the family home for a few years post graduation as in that case they could save a house deposit ,comparable to the student loan amount with aggressive saving and a LISA in 2-3 years as long as they can get a relevant graduate job of course.

But it will make a huge difference to the total amount paid back over time, particularly with associated compound interest, if she ends up paying all or even most of it back.

A number of people are saying this and it seems very strange to me. They seem to be saying that paying back 9% of your salary over 25K for 40 years is no different from paying back 9% of your salary for 20 years, because it's the same 9% of your salary either way!

I suppose it's based on the old idea that most people won't end up repaying it all anyway. But as a pp has pointed out, no one seems to have noticed that that's much less true of the plan 5 loans. And then there's the fact that the govt can change the terms any time it likes. One very simple way they could do this is by just not raising the 25K threshold with inflation but freezing it instead, like they've been doing with income tax bands.

Like a lot of people I find it impossible to predict how high her earnings will be. Her degree is not in a particularly high-earning field but it's at the best university in the country for that field and she's extremely clever and capable, so who knows.

I wouldn’t take it, as you’re right, it’s a lot longer to be repaying another 20k

It’s too late for her though. The difference between graduating with no loan and a £60k loan is worth consideration as it can mean it’s slightly easier to get on the property ladder in your 20s or 30s. The different between graduating with £40k vs £60k isn’t though. For the next 25 years, which will be her most formative in terms of getting on the housing ladder, starting a family, maybe switching to working PT, she’ll be paying 9% regardless.

If she used her inheritance to fund her third year it wont have any impact on her life until she’s middle aged, by which point she should be in a much better position financially so continuing the repayments won’t particularly benefit.

Essentially will £20k make more of a difference early on in her career, or once she’s well established in middle age.

Take the loan, make the decision in a couple of years when she knows where she is in a job. Imagine she doesn’t get a high paid role, then she would have wasted that money paying it off. If she gets a high paid role then you know you would pay it off at some point so using the lump sum is worth it.

Are you also able to help with a house deposit? If I was in her position I would much rather have help towards a house than help towards this.

Although I can see your point of view. It does seem like a good investment. The interest on student loans has been very high and it's a noticeable amount you have to pay back each month. I really hate mine!

But what about in 5 years or so when she wants to buy a house? You will have given the money to the government instead of her and she will still be paying back the same monthly amount.

IMO there’s no point prioritising paying less interest over the course of 20-30 years by using money that could help her much sooner.

Yes. There'll be a small inheritance some time in the next few years that can go towards a house deposit - although obviously if we take the third year loan it could free up a further 20K for that deposit which would be better.

Martin Lewis makes the point that student loans are the best finance available - interest capped at RPI, no repayments if you lose your job or don't earn enough etc. So it's better to have a higher student loan and a lower mortgage than vice versa. That makes sense, but the thing that makes me hesitate and that AFAIK he hasn't addressed, is the open-ended possibility of the loan terms being revised. You don't have that with a mortgage. Most people take out fixed rate mortgages not variable ones - you know for a certain number of years what the terms and interest rate are and then you renegotiate or go elsewhere, rinse and repeat.

By contrast, when people talk about just accepting that the student loan is part of your life until you're 60, they're talking about accepting a financial liability far into the future on terms and an interest rate that you ultimately have NO IDEA about, that could be rewritten on a whim by the lender however they see fit. I don't understand how people are so relaxed about that.

Hence the 40K / 60K difference - it's a question of whether in 5 or 10 or 20 years' time, if the whole picture of the loan, the interest rate and her circumstances turn out to be unfavourable, could we scrape together the money to pay it off? Or make overpayments along the way to keep it at a manageable amount for that eventuality? That's more likely to be possible on 40K than on 60K, particularly with compound interest.

I get that the loan makes sense, now. I just don't get the idea of accepting a loan amount that will soon snowball with interest to a point where she doesn't have the choice of paying it off, and is forced to pay whatever the government of the day says she has to - up to 40 years from now that we can't possibly predict.

As favourable as the plan 5 loans seem now, most people would never accept any other loan on that basis.

Interest rates and terms won’t change (though salary thresholds may). If they do it’ll be as another loan product. Hence why Plan 5 loans were introduced - it wasn’t possible to amend Plan 2 loans.

It won’t matter unless you can pay it all off asap.

I graduated with 3k per year loans and 3k maintenance. I think it’s nearly 70k now.

The loan terms specifically state that they can be changed.

It’s fixed at RPI

He should take the loan it really makes no difference. I'm 37 and my loan just comes out my salary like a tax never even think about it. Its not 'proper' debt like a mortgagein my view. The jump from 2nd to 3rd year debt really isn't going to make a difference lomg term.

I would avoid getting the loan. Most definitely. What if the investment value crashes? I really don’t understand the mentality of get it anyway if you could avoid it.

What investment value?

20k in the bank will be more useful to her in a few years for car house deposit etc
She will be paying%salary anyway

People keep saying to put the monies she has come into into a S&S ISA. So that investment value. Not sure your confused face was really necessary?

Oh - your post wasn’t clear. It sounded as if you were thinking the loan was invested somehow! Sorry!

It shouldn’t be too difficult to find a guaranteed savings rate that exceeds RPI though so there’d be no loss by investing. Doesn’t have to be in shares.

And it can be unfixed.

Yes that is a good point @titchy re investment and I can see I wasn’t clear in my post. Thank you for helping to clarify.