University loan - is there interest?

[TeenageWildlife]

Maybe stupid question, but whilst actually at Uni, do you start paying interst on loans straight away? How does it work?

it depends what you mean by "loan" do you mean tuition loands & maintenance loans from the government? Or do you mean short term loans provided by the university itself?

Yes you pay interest on loans from the student loan company (ie tuition & maintenance) from the moment you get them. Interest is 'linked to' the rate of inflation and is set once a year, at the inflation rate on a particular day (think it's in April) which is why DS paid 4.8% on one year when for most of that year the inflation rate was less than 2%

Depending on your family income, some of the money you get from student loans may be in the form of a grant rather than a loan; you won't have to pay back that bit.

Oh, so if they have some inheritance money, it's not worth investing that and getting a lona then?

Well, it probably would be, as the interest rate may still be lower than the rate you get from investing it - DS was just unlucky that the day they fixed the interest rate for that year, the inflation rate was unusually high (pensioners on the other hand got lucky, as it was also the day their inflation based rise was fixed)

If you invest the money you will probably end up with a bit more interest on it than you incur on the loans and you can still use it at the end of the course to pay off the loans if that looks a better bet.

{Disclaimer: I have no professional financial knowledge, just experience of 2 DC at university)

Have you looked at this site?

Yes, a while ago and all of the finance prospectus stuff, but still feeling very unclear. Really appreciate your wise help.

At the moment the interest rate is extremely low (and for some older loans it is negative) because the loan rate is tied to bank rate.
If, for instance, you wanted to pay your tuition fees, it would currently be more sensible to invest this money instead and pay the fees off at a later date when the interest rate rises.

Of course, if the student then goes on to a job and earns a reasonable salary they are going to have to pay it back from their salary anyway.

You can't invest the tutition fee money Lilymaid - the student never sees it. It goes straight from the loan company to the uni.If you don't take the loan you have to pay the cash upfront.

You could invest the loan however, but the loan company is such a nightmare I wouldn't bother.

In DDs first year about £60 a month was been added in interest from the very first month (tuition fees and loan) Less so the 2nd year and will be zero this year I think.

I wouldn't expect to invest the loan given by the student loan company!
What I was writing about was investing my/our money for three years and then paying the whole amount off on graduation - or later depending on the interest rates.
(Have already put one DS through the system, so am well aware of student finance).

It is worth investing your money and using the student loan. These loans have preferential rates, they are lower than the market rate and I believe the current year is set at 0%. I have been looking at this for us, but only posting as a layman, not got any investment qualifications!

Yes the current rate set by the Student Loan Company is 0% so money that one might spend paying off a debt at present would be better invested and the increased capital used to pay off the debt later when the interest rate starts to rise.
I thought it might be helpful to put up here the details (as currently known) for student
loans for students starting in 2010-2011:

In 2010/11 students starting a full-time course will be eligible for the same level of up-front maintenance support that was available for new students in 2009/10:

• the full maintenance grant will remain at £2,906
• the family income threshold for a full maintenance grant will remain at £25,000
• the family income threshold for a partial grant will remain at £50,020
• maximum maintenance loans and thresholds will remain at 2009/10 levels, which for a student living away from home outside London could be as much as £4,950 a year

Students continuing their studies in 2010/11 will also be eligible for the same levels of maintenance support that they received in 2009/10.

In addition, new and continuing full-time students will be able to access a fee loan of up to £3,290 a year, which has been increased by 2.04% in 2010/11 to reflect the up-rating of the maximum tuition fee level.

Thanks Lilymaid, that's as I thought, probably better to take the loans, invest the money that she already has in Bonds and earn a bit more than it would cost including interest.