Any good investment products to hedge student loans?

ratechaser

coyrls said:

Deleted_User said:

ratechaser said:

Deleted_User said:

You could look at student loans as leverage for the family portfolio. I wouldn't borrow to invest if the leverage cost RPI+3%, so I'd be inclined not to take out the loan at all. Which also keeps it simpler.

...which was our starting point, given we have the ability to fund this already. But the MSE article on this is interesting reading, and certainly suggests on balance that taking the loan is the right move. 

If I could be certain that my little darlings would study hard, go on to get high flying careers with big salaries, then just paying now would be obvious - but there are so many variables that could mean that doesn't happen. I would still be very proud of them if they decided to work for nonprofits or in the public sector, but in that case the salary would mean that repayment of the loan might not be needed (and rightly so if they are following a more ethical career than I chose!).

So this is about hedging from the other direction - take the loan, but look at the most suitable repayment vehicle from us, if it is ultimately needed...

And if I were a new graduate, I'd be happy enough that I could pick any area of work and have no loan hanging over me (or no higher marginal tax rate, if you prefer). (In fact, that's literally what it was like when I was a new graduate .)

What was the basic rate of tax when you were a new graduate?

In my case it was 23%, but then my starting salary (adjusted for inflation) would have had me paying back my loan from day 1 at the top interest rate.

However as I got free tuition and a maintenance grant back then, these sorts of comparisons aren't always useful, other than to say that I'd like my children to have the same benefit of free higher education that I got...

HansOndabush

Just fund them now and don't take a student loan then. Aiming to beat RPI + 3% consistently will be difficult and risky.

Funny (NOT!) how they use RPI to charge you interest but all their savings products now use the lower CPI; can't think why....

ratechaser

HansOndabush said:

Just fund them now and don't take a student loan then. Aiming to beat RPI + 3% consistently will be difficult and risky.

Funny (NOT!) how they use RPI to charge you interest but all their savings products now use the lower CPI; can't think why....

 Yes, the whole RPI thing only ever works against you these days...

But interest is charged at RPI only once they graduate, at least until they hit the income thresholds for repayment, and that would be the point where I'd want to repay it anyway.

Or of course they may never earn enough to need to repay it.

So frankly if I could hit RPI level returns with a low-ish level of risk/volatility, the 3% additional interest while studying would be a small price to pay relative to the possibility that the loan could end up never having to be repaid at all...

HansOndabush

Of course there is a real possibility of high inflation looming which would reduce the real cost of any normal fixed-rate loan (but not one linked to rpi) but also reduce the purchasing power of your savings. Worth thinking about.

ratechaser

Deleted_User said:

Matching RPI can plausibly be done with rather less in equities, but you still have to take some investment risk. The matching you'd prefer isn't available as such. Or just stay in cash, and accept returns of perhaps 1% below RPI?? Interest rates on cash will almost certainly rise if inflation rises significantly, though they may remain a bit below inflation.

Thinking about the choice another way: if you paid upfront so no loans are needed, and subsequently your children go for lower-paid lines of work, would you then find that you'd like to help them buy a house but don't have the spare capital to do that? Because that would be a better reason to take the loans in the first place. If you'd still be in a position to help them with houses, there's less reason to take the loans.

They are already very well set up for house deposits through their JISAs. That does not however negate the point of the loan - the way our system is set up now is that you are effectively eligible for free higher education IF your income remains below a certain level - and it would be silly to close off that opportunity by simply paying up front. 

Clearly if they earn more, it's only right and proper that they repay the loan, it's just that we intend to do that on their behalf.

Apodemus

One aspect that hasn't been mentioned is that it is your offspring who ultimately will take the decision on whether to take the loan and whether to pay it off, regardless of what you decide to do on their behalf.  You can lead a horse to water...! 

ratechaser

Apodemus said:

One aspect that hasn't been mentioned is that it is your offspring who ultimately will take the decision on whether to take the loan and whether to pay it off, regardless of what you decide to do on their behalf.  You can lead a horse to water...! 

And that's why we are likely to keep the money we set aside in our names. Their choice then, we pay it off for them or we don't. But there is no 'cash alternative' for them!

Apodemus

ratechaser said:

Apodemus said:

One aspect that hasn't been mentioned is that it is your offspring who ultimately will take the decision on whether to take the loan and whether to pay it off, regardless of what you decide to do on their behalf.  You can lead a horse to water...! 

And that's why we are likely to keep the money we set aside in our names. Their choice then, we pay it off for them or we don't. But there is no 'cash alternative' for them!

In practical terms, I'm not sure you can "pay it off for them", they are the ones with the loan and the relationship with the loans company.  In the end, you will almost certainly pass the money to them as cash and they will pay it off.   I'm holding an amount of cash to pay towards my kids' student loans, but so far they've cleared their own loans shortly after graduating without my prompting or input.   The apple doesn't fall far from the tree!

ratechaser

Apodemus said:

ratechaser said:

Apodemus said:

One aspect that hasn't been mentioned is that it is your offspring who ultimately will take the decision on whether to take the loan and whether to pay it off, regardless of what you decide to do on their behalf.  You can lead a horse to water...! 

And that's why we are likely to keep the money we set aside in our names. Their choice then, we pay it off for them or we don't. But there is no 'cash alternative' for them!

In practical terms, I'm not sure you can "pay it off for them", they are the ones with the loan and the relationship with the loans company.  In the end, you will almost certainly pass the money to them as cash and they will pay it off.   I'm holding an amount of cash to pay towards my kids' student loans, but so far they've cleared their own loans shortly after graduating without my prompting or input.   The apple doesn't fall far from the tree!

I'd be surprised if a loan company wasn't happy to take repayment from whoever was willing to pay them, but we'll cross that bridge in the unlikely event it appears. And if they do just repay them themselves - and they will certainly have the means to do so - then we'll just give them more money towards a property or whatever. It's not a problem I'll lose sleep over either way!

md258

A slightly different way of thinking about this would be
"If your parents gave you £xxx at some point in your life, when and what would it make the most difference?"

For me personally, I'd say that the extra deposit towards my flat and the lower interest rates I had as a result. This meant that I could then move to a good sized home which will be big enough for my family forever. This has probably made a bigger improvement to my quality of life than paying off my student loan would have done.

(I graduated with the approx 1k per year fees and have always earned well and so have paid off my loan already. If I had 30 years of extra tax I may feel differently,  but I think it should be a discussion with your children rather than it being for their loan and nothing else)