Student wanting to Invest Loan

Bretington

Hi all,
So I'm about to embark on 5 years of Medical School and will be receiving a £3500 odd maintenance loan in 3 installements, presumably every year, making a total of around £17,500.

Now I don't need to use this money as such and was therefore intending to place it into a high interest account (HSBC preferably), collect interest or dividends and then pay back the lump sum + loan interest as soon as I graduate (hopefully!) 5 years from now and keep whatever's left.

Just curious if anyone's done this before and has any advice on what's the best way of doing it?

PS
A particular point that makes comparisons tricky I have found is that as a student I normally don't need to pay tax (right?) so tax free ISAs may not necessarily be the best choice.

Lokolo

I wouldn't invest all of it.

You can easily beat the current student interest rate of 1.5%, there are plenty of ISAs which pay above 2% and I believe NR do an ISA around 3%.

Over my 4 year course I ended up with £18k, I only invested £2k of it, the rest is in a 2.8% ISA.

atypical

Bretington wrote: »

So I'm about to embark on 5 years of Medical School and will be receiving a £3500 odd maintenance loan in 3 installements, presumably every year, making a total of around £17,500.

It will be around that figure. The maintenance loan amount increases every year. In your last year you receive less as the year is shorter given than you graduate i.e. no summer holiday period.

Bretington wrote: »

intending to place it into a high interest account (HSBC preferably), collect interest or dividends and then pay back the lump sum + loan interest as soon as I graduate (hopefully!) 5 years from now and keep whatever's left.

HSBC generally doesn't do high interest. If you want to play the rate tart game you'll need to give up any loyalty to a particular bank.

I wouldn't rush to pay back the loans after you graduate. You should still be able to profit, but even if not it's the cheapest money you'll likely ever be given. Read this article here.

Bretington wrote: »

Just curious if anyone's done this before and has any advice on what's the best way of doing it?

Like Lokolo, I've also been saving my loans. Just treat them like normal savings and chase the best rate. You might also want to consider fixed term deposits but that means making a judgement call on where you think interest rates will be in 'x' years time.

Bretington wrote: »

A particular point that makes comparisons tricky I have found is that as a student I normally don't need to pay tax (right?) so tax free ISAs may not necessarily be the best choice.

If you earn less than the tax-free personal allowance (£7,475 this year) you don't need to pay income tax. If this is the case, complete an R85 form for any accounts you open to receive gross interest.

If you decide not to pay back the student loans after graduation then cash ISAs make sense. It would take 4 tax years to ISA the £17,500 or so.

DragonQ

It's a great idea to make money off of these essentially free loans. Almost all of my savings is from student loans, bursaries and grants. I owe nearly as much as I have saved but there's no point paying it back early because the current interest rate on student loans is 1.5% and I'm getting 3.0-3.3% on it all. That's with instant-access accounts too, you could earn more if you lock it away for a few years.

Also remember that you're not a tax payer (presumably) so you can earn gross rather than net interest. This actually means some savings accounts are better than ISAs in the short term!

hermante

I doubt that the student loan rate is going to stay at 1.5% for 5 years. Assuming that ISAs will continue to exist tax-free for at least the next 20 years or so, if you intend to work (and pay tax) in the UK, then you should put as much into ISAs as possible, i.e. start now. If a gross savings earns more, then put money into the ISA as late as possible towards end of every March.

While savings account rates will probably rise when the BOE rate (and thus the loan interest rate) rises, you need to be careful that you are actually earning more than your loan interest. You say you don't need the maintenance loan, which means you have some other source of money. You also have the 0% overdrafts to consider. Are you also getting a tuition fee loan?

For example, when the interest rate rises, you might be paying 3% interest on £15000, but only have £7000 in a savings account at 6%. In that case you don't really want to take out any extra loans. Now that you have free time, you need to sit down and prepare a spreadsheet that works out how much you are earning on all your money, your expected expenditure (hard to predict now, will become easier later on) and how much you owe.

I know this is 5 or 6 years away but you don't want to be doing this for the first time when you are an F1! I've just been trying to do this with some friends in final year.. needed to decide whether it was worth it to borrow extra money for elective holidays

atypical

hermante wrote: »

While savings account rates will probably rise when the BOE rate (and thus the loan interest rate) rises, you need to be careful that you are actually earning more than your loan interest.

For example, when the interest rate rises, you might be paying 3% interest on £15000, but only have £7000 in a savings account at 6%.

You should always take the maintenance loans. Being able to make a 'profit' is almost just an added benefit. You will never have access to loans with terms as advantageous as the student loan terms (e.g. capped at lower of BoE+1% or inflation, written off after 30 years, no repayments if earning under £15k).

If in the future the OP gets a mortgage he can use his saved student loan in place of what would have been borrowing at commercial rates. That's what Martin explains in the article I linked to above.

DragonQ

atypical wrote: »

You should always take the maintenance loans. Being able to make a 'profit' is almost just an added benefit. You will never have access to loans with terms as advantageous as the student loan terms (e.g. capped at lower of BoE+1% or inflation, written off after 30 years, no repayments if earning under £15k).

If in the future the OP gets a mortgage he can use his saved student loan in place of what would have been borrowing at commercial rates. That's what Martin explains in the article I linked to above.

You also don't usually have to start paying it back if you go on to do a postgraduate degree as the stipends do not count as taxable income (and thus do not count towards the £15k minimum income before repayments must be made).

Bretington

Thanks for the feedback!
At the moment, I'm looking at Post Office online bonds, 3 years at 4.21%, 2 years at 3.96%, 1 year 3.41%.
Just trying to figure out whether this would outperform the loan interest. When looking at the history of student loan interests, I can see that sometimes I would have been paying more than I would have been earning.. (wiki "student loans in the uk")

DragonQ

Yes, student loan interest was 4.8% a few years ago (not for long though). However, the current rule is that the interest from September to August is the lower of these two values:

- RPI in the previous March
- Current base rate plus 1%

So it's likely to be pretty low for a while yet

atypical

Bretington wrote: »

Just trying to figure out whether this would outperform the loan interest. When looking at the history of student loan interests, I can see that sometimes I would have been paying more than I would have been earning.. (wiki "student loans in the uk")

If you want to lock in a guaranteed break even or 'profit' get an account that tracks base rate + 1% (1.25% when you're earning) or above.

Lloyds TSB has a 2 year fixed term deposit tracking at BoE + 2.7%.

wastedtalent

Keep it for a deposit, my student loan is in the bank waiting to be used towards my first property, hopefully before the end of the year.