Using student loan to fund LISA - good idea?

HandyMandy

Our daughter will start studying at our local university in September and living in Scotland she has free tuition. 

She has a part-time job to fund her social life and will continue to live at home (only 20 minutes bus ride to Uni) so she’s in the fortunate position of not needing the maintenance loan. Kinds under 22 also have free bus travel in Scotland. 

I am thinking it would be a good idea for her to open a LISA and invest her annual maintenance loan of £4,000 in it so she gets the maximum 25% bonus each year she’s at university. The interest she’ll be charged on her maintenance loan will be well below the 25% bonus the government will pay. There’s also a chance she might never actually pay off her loan. 

Am I missing something as it seems too good to be true,  are there any risks involved (other than the funds can only be used towards a property)?

jaypers

This is a difficult one for me to get my head around as I can see your logic, however the philosophy of it troubles me. As I’m sure you know, any student loan is effectively a future tax. This could be offset against her income for many years, or until cleared, if hopefully she earns a good enough income to cover it off. Although not a loan in the sense of normal borrowing, I’m still not sure that this is a good approach. Would do some projection spreadsheets and look at the numbers in detail. 

MX5huggy

The interest charged is not comparable to the 25% because the interest is every year for whatever the period she has the loan (do they charge interest from the start or just after graduation). 

That’s not to say it’s a bad plan. Is she likely to find a property below the LISA purchase limit? Will she invest the LISA is stocks and shares as it’s presumably many years till she might want to buy a property or go for cash which will loose to inflation ATM.

I would take the loan. 

Albermarle

Student loans start attracting interest straight away, although clearly the loan is smaller in the first year .
As she starts this year she will still be under the old system, and the current interest rates are around 4.5% I think .

So as MXHuggy says the 25% bonus is a one off, and after that the LISA would have to gain 4.5%pa to keep up and maintain the value of the Lisa fund . A cash Lisa would not be able to do this so after a few years the values of the 25% bonus would eventually be lost . A S&S LISA may or may not produce good enough returns , or may go down further .

On the other side the student loan maybe never have to be repaid .

On balance I would take the loan .

tebbins

I've briefly looked at https://www.gov.uk/repaying-your-student-loan/which-repayment-plan-you-are-on and https://www.saas.gov.uk/guides/funding-guide, I am more familiar with the English system.

I agree with the consensus, probably the only atlernative that could work better for her is a gift from the bank of mum & dad. I acknowledge the ethics of it, raised by @jaypers but, ultimately, after decades of stagnant wage growth and high house prices, young people have to do what they can to get themselvesinto a good financial situation and there is nothing in the student loans regulations that says you can't use it for a LISA deposit.

From what I can gather, she would be able to borrow up to £6,100 for 2021-22, I don't know if the amounts for 2022-23 will be different, and this would be treated as a Plan 4 Student Loan. Plan 4 means she would only start repaying from the tax-year starting after she finishes university (i.e. if she starts September 2022, graduates by September 2025, repayments from April 2026).I also don't know if there is an option to choose to borrow less than the maximum offered. If she borrows only £4,000 for 3 years, that's a principle of £12,000 plus some interest by the time she becomes liable to repay., perhaps £13,000 by then.
The interest rate is the lower of RPI or the BOE base rate, +1%. This, and the repayment terms are probably better than any commercial loan rate or money transfer credit card she may currently be able to get however maybe not better than a mortgage. This would turn into £15,000 of LISA money, plus some interest by the time she becomes liable to repay. I am assuming she only 3 years at university. I think the 'debt' is canclelled after 30 years for Plan 4 but have not found information to confirm this.
Repayments are at 9% of income over £25,000, close to the lower bracket of the Scottish Intermediate 21% rate tax band, essentially her marginal tax rate above that threshold will be 21% + 13.25% NICs + 9% SL repayments = 43.25%.
The reality for most English students is they will never pay off their £50k+ 'debt', so there's no point worrying about the debt, the real cost is a higher marginal tax rate for life.
However because the principle here is smaller, the chance she may end up paying it off in full is greater. If she never earns over £25,000 it's free money. If she goes onto earn not much than that, on average over her working life, she may repay less than £12,000 in total. If her lifetime earnings average £30kpa, her average repayment would be around £450pa, £37/month, £450pa x30 years > £12,000. This is extremely simplified but goes to show it's not unlikely she may end up paying back an amount comparable to the principle. The more she earns, the faster she repays and the less interest she repays too.
This isn't a 'debt', it doesn't show on a credit report, and she may value being able to buy more house sooner and having a financial head start coming out of university. Effectively it would be borrowing against future earnings, and in return getting the advantage of being in a position to buy sooner.
Other risks include specific restrictions on the LISA, you can only withdraw for a house purchase or at age 60, there is a house price limit that it can be used for, you have to buy via a solicitor etc., so naturally do some proper research into the LISA terms and conditions to make she understands what she's getting into.