Why might I not opt to receive a maintenance loan for University

hazelevans

I am starting University next year. I come from the lowest income bracket of family and I have no external savings or income.
I am opting in for the tuition loan to cover the £9000 course fees and I am opting in for a maintenance grant of £3354 and the university I am applying to study at offers cash bursaries of £3500 to students with backgrounds such as myself.
I also plan to apply for as many scholarships and bursaries as I can to add to my funds and perhaps take on a part-time job if necessary.
At a minimum, my funds for the year would total £6854 and for my accommodation, bills included, I can expect to pay roughly £5109 for the year. This leaves a minimum surplus of £1745 (and I would expect to add to this with scholarships etc.)
As a very conscientious budgeter, I feel I would be able to get by without taking out the maintenance loan. (I would receive £5998 ML)
My question to the forum is why should I take such a loan I will most likely be required to pay back at 9% interest + inflation a year when it does not seem necessary to do so?

Thanks

HappyMJ

£1,745 is only £33 a week...it's not much...but if you can get a job to supplement that then you should be fine.

Where does 9% interest + inflation come from? Isn't the maximum rate RPI+3%?

Apples2

My question would be, why will you only consider getting a job if it is absolutely necessary?

pheonixrising21

Apples2 wrote: »

My question would be, why will you only consider getting a job if it is absolutely necessary?

Not wanting to "discredit" you, but the OP may want to concentrate on their studies until such a time when poverty becomes detrimental to said studies.

That said, I had a part-time job at uni, working for the uni and going out to local schools to give talks on uni life, etc. I did more of this work in the 1st and 2nd years than the final year, and was able to fit this in around lectures, etc.

securityguy

The loan is only repaid as a proportion of your income over 21k, and written off after thirty years. If you're planning to earn a huge amount as soon as you graduate, the repayments are trivial and you still have most of a huge amount. If you're planning to earn rather less, your repayments are trivial.

The interest rate is 3% plus inflation, by the way, not 9%. The 9% figure is the repayment rate (ie, you pay 9% of your income over 21k). That you have based your assessment on a three-fold misunderstanding of the interest rate implies other parts of your analysis may not be accurate either.

A loan whose repayments are coupled solely to your income, where the repayments stop if your income falls below a relative high floor, and where the debt is written off after 30 years anyway, is the softest money it's possible to borrow.

I've modelled the whole process, based on various income profiles, preparatory for my children going to university in a couple of years' time. I can imagine no scenario, ranging from "no parental input" to "parents willing to pay every penny" where taking the loan is a bad idea. Parents using their savings to pay rather than taking the loan are ill-advised, in my view: if you've got that money available, it will be of far more use later as a house deposit, funding for a post-graduate qualification or something. I'm not sure how long the current student loan scheme can last, as it seems insanely generous (certainly compared to the system it replaces), but unfortunately the bottom-line "debt" is tending to obscure people's view of the overall cashflow.

Gr33ng1ng3r

Take the loan. If you feel you won't use it, put it in a savings account but it will be there when you want / need it. Despite budgeting, stuff happens and you don't have a lot in reserve on a student budget! For example, DD1 is having to make 2 long train journesy when one was initially budgetted for as part of her final year studies. She could have refused but it my well lead to work on graduation. Silly little amounts can mount up - if you play sport you will have match fees and travel costs to include, laptops need repairing, food gets taken from communal kitchens. There are lots of things you made need a little extra for. If you don't use it you can always choose to pay it back in one lump sum on graduation.

Herzlos

It's the best credit deal you'll ever be able to get, and is worth taking it as a buffer. Put it in a savings account and it might even pay for itself.

If you never actually need to use it then good, just pay it off. But you might find things happen when you can't budget for, and you'll pay more in books than you ever thought possible.

InsideInsurance

It used to be silly not to take it because it simply used to be at the rate of inflation and so when we were in recession it actually went down without you paying anything.

As has been highlighted though, the rate is now the RPI plus 3% and so at todays rate is 6.1% interest.

If you are going to have to borrow money anyway then it is a very good rate and as a student you will be unlikely to get much below that from anywhere but if you dont need the money you will be losing money by taking it and sticking it in savings as no one is offering interest rates close to 6.1% for savings

jamesmorgan

According to government figures the majority of graduates will not have fully repaid their loan after 30 years. For these students the amount they pay is based purely on what they earn and not on how much they borrow. So for these students concerns about how much they have borrowed or what interest rates apply are of little concern. However, if you are likely to end up with an above average graduate salary then you need to do some financial modeling to see the effect on your net worth after 30 years.

For info, the average salary for graduates in employment is around £40K. This starts at about £21K after graduation and rises to around £45K at age 50. Note that these are historic figures and from a time when there were fewer graduates. It is likely that the graduate premium will fall in the future as there are more graduates.

The following table shows a very simplified analysis. For clarity, all figures are shown in today's values (ie without inflation). It shows the average salary at each age band and for simplicity assumes this is fixed over the 10 years. You have 2 options - either borrow the full loan (fees and maintenance) or just the fees loan. I think you will find the maintenance loan is only about £3823 if you are eligible for the full maintenance grant.

If you achieve average salaries (the first table) you will not pay off the loan after 30 years (whether you borrow £38K or £27K). The £11K you take as maintenance loan can be invested if you don't require it. For long term investment over 30 years this would be best in the stock market where you could assume growth of 3% in real terms. This would turn the £11K into £26K so you would be £26K better off by taking the maintenance loan.

If you achieve above average salary (the second table) you pay off you loan somewhere between your 40th and 50th birthday. The table assumes that you continue to invest your loan payments into a growth fund . In this scenario taking the smaller loan would make you £26700 better off, however, this would be exactly balance by the growth in the £11K loan so no net profit.



.................................3%......................3%
Age...............Payment/yr....Loan........Loan...Investment...Profit
..............................£38,000....£27,000...£11,000...£11,000
20-30....£25,000......£360....£46,942....£32,159...£14,783...£14,783
30-40....£40,000....£1,710....£43,483...£23,615...£19,867...£19,867
40-50....£45,000....£2,160....£33,675....£6,975....£26,700...£26,700

..............................£38,000....£27,000...£11,000...£11,000
20-30....£30,000......£810....£41,783....£27,000...£14,783...£14,783
30-40....£50,000....£2,610...£26,232......£6,365...£19,867...£19,867
40-50....£70,000....£4,410..-£15,302...-£42,002...£26,700.....£0