Should I take out a student loan or not?

Frugalgal28

Hello,

I have about £40,000 saved & Im about to start a 4 year university degree.

My tuition fees cost in total for the 4 years around £28,000. I estimate my living costs per year will be around £12,000 per year so £48,000 total

I am eligible for a student loan and can access a full tuition fee and full independent student maintenance loan per year to cover these costs fully.

Would it be sensible to take out this loan in full, which is almost 80,000 plus interest? That way I could keep my savings in their accounts.

or should I take out some of the loan (ie just the tuition fees loan), get a Saturday job and cover the rest of the living costs myself with my savings?

I anticipate having a medium-high earning job and calculators show I will likely end up paying off the 80,000 loan and the added interest before it’s written off at 40 years.

I’m interested to hear your thoughts!

Thanks

Frugalgal28

also it’s worth mentioning, this will be my second degree. I have a student loan from my first degree too, around 50,000. This one gets written off after 30 years.

silvercar

hi @Frugalgal28 welcome to the forum.

I’ll move this to the student board. There should be other threads on there from people who have had a similar dilemma.

silvercar

The fact this is your second degree makes the calculations more interesting. The way repayments work is that your repayment is 9% of earnings above the lowest threshold. The money is then allocated between the 2 loans, with the amount between the 2 thresholds being allocated to the loan with the lower threshold, the remaining amount going to the loan with the higher threshold. This clearly affects the way the loans decrease, often to your disadvantage. So it’s important to understand how this will play out for you, before you make decisions on whether to take the loan. In some cases it could make sense to take out the loan for the new degree and use your savings to clear the previous degree!

Which scheme is the old degree under? And how old are you? These facts may make it easier to advise.

Frugalgal28

Thanks for your response :)

I’m 29

My previous loan is a plan 2 student loan

Not sure if worth mentioning but I’m not on the property ladder so some of these savings were originally intended for a deposit. I also have an emergency fund which is not included in these savings.

silvercar

Plan 2 loans get written off 30 years after they first went into repayment.

Plan 5 (your new loan) has a repayment threshold of £25,000. Plan 2 repayment threshold is £29,385.

So the April after you finish your new studies, assuming a high enough income, you will pay 9% of £4,385 towards your plan 5 loan and 9% of your salary less £29,385 towards the old plan 2 loan.

Lets make 3 scenarios:

1.Take the new loan, don't repay old one

eg on a £50,000 income, £395 towards plan 5 and £1,855 towards plan 2. Total repayments £2,250. Plan 2 eventually gets wiped, which leaves plan 5 which will be wiped as it will be your only loan from 22 years time, not long enough to ensure repayment in full.

eg2 on a £75,000 income, £395 towards plan 5 and £4,105 towards plan 2. Total repayments £4,500 Plan 2 gets cleared in about 15 years, leaving 29 years to clear plan 5, which will happen approx 20-23 years time.

2. Don't take the new loan

eg on a £50,000 income, £1,855 towards plan 2. Loan eventually written off - so don't repay it.

eg2 on a £75,000 income, £4,105 towards plan 2. Loan eventually cleared.

3. Pay off the old loan and take the new loan

eg on a £50,000 income, £2,250 towards plan 5. Loan eventually cleared.

eg2 on a £75,000 income, £4,500 towards plan 5. Loan eventually cleared.

I've obviously made a million assumptions to get these figures. But is should give you an idea.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81975415#Comment_81975415

I'd always go for a house deposit, rather than loan clearance. A home is a home…and an asset.

Ed-1

https://forums.moneysavingexpert.com/discussion/comment/81975517#Comment_81975517

The plan 5 threshold will rise to £26,025 in April 2027 and keep rising while the plan 2 threshold is frozen to 2030 so the gap between the thresholds will narrow.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/81976592#Comment_81976592

As I said, a million assumptions, I don’t think that change dramatically effects the outcome.

It will be interesting, mathematically at least, when the plan 5 threshold overtakes the plan 2 threshold - if it ever will. At some point the government is going to have to review the rule on how much payment goes to which loan.