Should I take a student loan for a small amount of tuition fees?

georgiehorgan1

I am starting a 2 year part time course which costs £4,300 a year in tuition fees (£8,600 in total). I am working part time to support myself so as not to take out a maintenance loan and qualify for a student loan to pay the tuition fees. However, the interest rate on repayments is currently 7.1%. I am training to be a counsellor and wages are not that high when I qualify, so I'm concerned this loan could cost me a lot of money in the long run if i don't meet the repayment criteria for sometime- interest could accumulate quickly on what is a relatively small loan.

 I am 43 and with the current plan it doesn't get written off for 40 years, so I would still be liable at pensionable age which could affect my pension, as I assume ill have to make repayments from this. I have some savings and could afford to pay the tuition fees up front. With the interest rate at 7.1% on repayments should i pay upfront myself or take the loan? I am unsure financially which way forward is best 

 

MSE_ForumTeam5

We've moved this to the board that deals with student finance 

silvercar

Personally, I would either take all the loan I could get for maintenance and fees or don't take any.

Reason being that if some of it is going to get written off when you are 86 (!) then not taking the full amount means you have just gifted the government some money.

What else could you do with your savings, if not used to pay the tuition fees? And what else could you do with the money if you took the maintenance loan also?

QrizB

silvercar said:

Personally, I would either take all the loan I could get for maintenance and fees or don't take any.

I agree with this.

georgiehorgan1 said:

I am training to be a counsellor and wages are not that high when I qualify, so I'm concerned this loan could cost me a lot of money in the long run if i don't meet the repayment criteria for sometime- interest could accumulate quickly on what is a relatively small loan.

An example calculation follows. I've had to make up a lot of numbers. If you have a better idea, you can copy my method with your numbers and see what you get.

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Let's imagine you make £30k per year once qualified. Your loan payments will be 9% of whatever you earn over £25k -  that's 9% of £5k, or £450 per year.

Let's imagine your income remains £30k per year for 23 years, until you're 68 and retire. You'll pay a total of £10350.

Let's then imagine that, once retired and a pensioner, your income falls to £20k per year. You won't pay another penny towards your loan.

At 86, whatever is left is written off.

If you have only taken a loan for the fees, that £8600 has cost you £10350 over 23 years. That's a pretty good deal, an effective interest rate of just under 2%.

I don't know how much living loan you would qualify for, but I'm going to assume it's at least £4k per year - £8k total.

If you also take the maintenance loan, your total loan of £16600 will still only cost you £10350 over 23 years. That's an amazingly good deal, you get more money out than you pay back.

Ed-1

There is an incorrect assumption here that pension income is subject to student loan repayments. It isn't (as it's not subject to National Insurance Contributions).