Should my daughter pay off student loan with lump sum?

David_Rowley

My daughter is in her first year of university, lives at home and has paid a £9250 fee for the first year through a student loan. This was against my advice as me and my wife have saved up around £20,000 for her and want her to be debt free. She has read a lot on student loans and was adamant that it would be a waste of money to pay up front as most people never get round to paying off their loan and the government writes it off. My argument is that paying off the loan, with its extortionate rate of interest, will be an extra income tax she will face throughout her 20s and probably 30s too. Who is right here?
One other piece of information. My daughter has built up a five figure sum in her bank account from a job she had during a year in-between sixth-form and Uni.  

sparelogin

She's probably right. There's no extortion used in the interest rate and it's unlikely she will repay the debt in full.

But you won't know until she starts earning.

MalMonroe

There's some great info here : 
https://www.ucas.com/student-finance-england/repaying-your-student-loan

Did you see Martin's programme on Thursday 11 March? Lots more great information all about student loans. You can catch up on YouTube (no ads) or even the ITV hub.

Your daughter is doing the right thing. 

As Martin is fond of saying, there is no panic with student loans. No repayments will be due until the April after your daughter graduates. But only IF her salary is at or above the repayment threshold.

She's right when she says the loan will be written off after thirty years, unless of course she's been earning over the repayment threshold. 

The interest rate on a student loan is 9%, which isn't extortionate at all.

AnotherJoe

Theres a whole section in this website on this, look at the student tab above on this page or here https://www.moneysavingexpert.com/students/repay-post-2012-student-loan/ 

TLDR is, your daughter is most likely to be correct.

pjcox2005

David_Rowley said:

My daughter is in her first year of university, lives at home and has paid a £9250 fee for the first year through a student loan. This was against my advice as me and my wife have saved up around £20,000 for her and want her to be debt free. She has read a lot on student loans and was adamant that it would be a waste of money to pay up front as most people never get round to paying off their loan and the government writes it off. My argument is that paying off the loan, with its extortionate rate of interest, will be an extra income tax she will face throughout her 20s and probably 30s too. Who is right here?
One other piece of information. My daughter has built up a five figure sum in her bank account from a job she had during a year in-between sixth-form and Uni.  

If in the future your daughter pays off her student loan (or even a proportion of it) through wages earned then she is probably doing OK and I expect will cope fine with a slight reduction in take home pay due to the additional "graduate tax".

If she doesn't pay it off, or finds herself out of work for a period, then the security of having savings will be a much bigger benefit personally. Not to mention added elements like being able to use for a house deposit (or just for fun) in the future may save more than the loan interest through rent.

I personally would suggest your daughter is right even if she ends up in a position to pay student loan off in full. The opportunity cost of losing a big chunk of money now is quite significant. It also doesn't factor in that you may find student loans are reduced in future by Governments as it has come up in the press quite a lot of times.

Cheese1990

Your Daughter is correct. I'm going to assume she recieves the minimum maintenance loan and her fees so essentially the government is lending her about £42k which she won't repay anything on until she meets the threshold. So assuming she leaves uni and gets an OK starting salary of 25k and has an annual pay rise of 4.5% without fail for the next 30 years then she would only repay about 65k meaning a relatively low interest rate and this is a scenario where she has no void periods I.e. taking any maternity leave or periods out of work for caring/ retraining. Also bear in mind with the cash she could invest it or use it to help buy a property.

FaceHead

Who's right depends on her future earnings. For most students she's probably doing the right thing. If she was really likely to be a very high earner, then paying the loan off immediately could be a good move. 

Is your daughter likely to be a very high earner, i.e. is doing a degree which tends to result in high earnings like Maths or Economics, at a university where students tend to go onto the top jobs? Gender is also an indicator future earnings, so based on the limited information available she seems to know what she's doing. 

helpyhelper

I'm not sure why you think it is an extortionate interest rate. Its the lowest interest rate she'll ever get and she only has to pay it off when she earns well, at a very slow rate. There is no reason to rush paying it off which is why most people pay it off at the slowest rate possible. She'd be better using her savings to invest.

TheMrsNesbitt

Your daughter is right like many others have said. It's not a debt to fret about, even when earning over the threshold. I'm 31 and only started paying my Plan 1 loan (2008-2012) and my Post-Grad Loan (2018) back around 3 years ago. I'd keep the lump sum you've saved for her for something else, like a house and other big life milestone events  

[Deleted User]

I started uni in 1999, was 5 years eventually, started paying back on the old garbage plan where it came out of wage when you hit £15k. I passed the threshold where my payments are now more than the interest a few years ago. Depending on pay rises and such, I may or may not pay it off before I get to 65 when it's cancelled but it is nice to see it going down slowly.

Ibrahim5

I think that after they increased the fees from £3k to £9k there was some argument over whether £6k would be better. I suspect that this represented government realising that they had made a change with unintended consequences. At £3k it made sense to try and pay it off. At £9k it isn't worth trying. £6k would have been an attempt to return it to a debt worth repaying.