Guide discussion: Should you pay for uni upfront or take the new Plan 5 student loan?

MSE_Ben_S

This is the place to discuss Martin's new guide on 'Should you pay for uni upfront or take the new Plan 5 student loan?'.

We'd love to hear your thoughts, personal experiences, and general feedback. 

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glaciallyfast

I like a lot of what Martin/MSE have said about the Student Loan previously, that it's a Grad Tax rather than a loan. But with the new Plan 5 I think that's less true. The interest rate is low (and fair) so the loan value doesn't become ridiculous; and with the lower repayment earnings threshold and 40-year limit, many more people will be repaying. So it is more loan-like, albeit with an odd repayment plan of 9% above threshold.

With regard to the "should I take a loan or pay up-front?", I think MSE, along with most people, have missed the point a bit. Under both old and new (Plan 5) system, the starting point seems to be "will the loan be repaid?". I don't think that's the right question, under either plan. In my view, the question is "if I have the capability to pay up-front, but I invested the money instead, would the accumulated fund cover the additional income tax payments and leave a surplus?"

My daughter is about to embark on a 5-year Vet Med course. We're in a position where we could pay the fees and give her the equivalent of a maintenance loan, but the plan is that she takes full Student Loans (approx £20k) and we give her £20k a year to invest in ISA Funds. At the end of her course she'll have a £100k fund plus investment returns. By my reckoning that is likely to grow sufficiently to pay her extra 9% income tax contribution and still leave a surplus. Doesn't matter whether the loan is repaid, or written off after 40 years, the question is whether the invested funds cover the income tax.

I've modelled this in Excel for old & new plans with various points of flexibility in interest rates, investment returns and earnings growth, for both 3-year and 5-year courses. With the old plan the outcome was less obvious, because of the high loan interest rate and 30-year cut-off, but with what I think are reasonable assumptions the fund rarely dries up before repayment/write-off. With Plan 5 I think it is intuitively simpler: will long-term stock market investments (wrapped in a tax-free ISA) beat an RPI-based loan? History suggests yes. Of course there's risk here, but it's a 40-year investment horizon. It also helps that the early withdrawals to cover the 9% above threshold income tax are relatively small, assuming that early-career salary will be much nearer the earnings threshold than later years.

Martin's "halfway house" approach of putting money aside in savings for the duration of the course  is a bit like this, but I think this is a much more positive approach. It's also flexible - if my daughter doesn't need to take the income tax help on a year by year basis then the fund increases more, or if a chunk is needed for a house deposit it can be used for that instead. (Or she's free to blow it all, but that's her life choice and we've done our bit.)

I'd be happy to publish my models, but not sure how I'd do that as I'm new to the Forum. Maybe I could make them public on OneDrive/GoogleDrive, but don't think I could link to them until MSE trust me more.

Any comments?

silvercar

I agree with you. We are in crystal ball territory as it all depends on future earnings. Entering a vocational career path it is more likely that someone will repay the loan in full, but if someone decides to change to a low earning career/ stop working/ go travelling etc the numbers may not point so obviously in one direction.

You are also adding some risk to the situation as you are relying on your investment yielding enough to cover repayments, this is in no way certain, not least because the government could change repayments at any time.

glaciallyfast

@silvercar - thanks, but I'm afraid you're missing my point. You're just reiterating the "will the loan be repaid" approach.

That's not my point. My point is that the investment fund I describe can cover the additional income tax payments AND still leave a surplus. Doesn't matter whether the loan is paid off or written off after 40 years, the question is whether building the fund covers the payments. If so, it's better to make that investment than pay up front.

Of course there are all the other issues of future salary uncertainty, changes of career etc, they just reinforce the argument to take the loan. And of course my approach carries investment risk, but as I note it's a long investment horizon. Over that sort of period I'm thinking low-cost trackers across various indices are highly likely to beat RPI.

silvercar

Too many unknowns on investment profits. Also the best use of money, would it be better spent on a vets practice? Or a property in a high yield area that your daughter could eventually live in? This strays away from student loans really, you are making a £20k investment each year for your daughter irrespective of the student loan angle, other than the amount is the same.

glaciallyfast

Regarding straying away from student loans - I see many people asking "should I take the loan or pay up front". So this addresses that key point: take the loan!

You're right that there are many other ways of using the money; and going down this path means she will have that choice. She could invest in a Vet's practice or a house. But I wanted to show that the contribution we're making is at least equivalent to her income tax payments, so she is not worse off because we would not pay up front. 

(My daughter experienced a bit of Trust Fund envy, when a previous boyfriend went to university proudly announcing he didn't need a loan. Smart as he thinks he is, in my view that was the wrong decision. Taking the loan and keeping the money invested is a better idea.)

silvercar

What is interesting is that you have decided to invest the amount that she would otherwise have had as a student loan. If the amount had been different, would you have invested a different amount?

glaciallyfast

Yes, my intention is to match the student loan. My argument being: I could pay £20k upfront, but I'd rather give her £20k to invest, as I think that will more than cover the loan income tax, or she can use it as she wishes.

QrizB

glaciallyfast said:

Any comments?

Sounds like a good plan.

SSISA returns should beat inflation, over the long term.

If I had £20k a year spare on top of my existing commitments, I might have done the same for my child.

glaciallyfast said:

My daughter is about to embark on a 5-year Vet Med course.

Harper Adams?

glaciallyfast

Thanks for your comments.

Nottingham (Sutton Bonington campus)

QrizB

glaciallyfast said:

Thanks for your comments.

Nottingham (Sutton Bonington campus)

Ive got friends in Nottingham. It's a pleasant city . I hope they have a good time there .