Student Loan advice

YourTurn · 11 May 2018 at 11:34AM

Hello,

I'm seeking some informal advice regarding taking out a student loan. I am struggling to make sense of quite a big financial decision due to recieving conflicting opinions and been given advice that would perhaps be more applicable to the typical 18 year old school leaver.

A bit of background first;
I'm mid 20's, very financially sensible and working on becoming financially savvy, I've had quite a few above average paying jobs so I have enough savings to support myself for the duration of my studies without any difficulties. The general advice I've been given is 'Don't worry about it, think of it as a grad tax, take as much as you can get because you'll never pay it off anyway'

I'm due to begin a medical degree in September. It's 6 years long including a foundation year that I am required to complete. Tuition fees for year 1 are £5140 followed by 4 years at £9250 (current price), year 6 is paid for by the NHS.

I would be eligible for only the minimum maintenance loan of £4054 (current level) for 5 of the 6 years (there are special arrangements in year 6 NHS/SLC).

The assumptions I'm making are; tuition fees stay at £9250, interest on SLs stays at 6.1% (RPI+3).

Scenario 1; Not getting a maintenance loan and paying year one fees up front would leave me with £45620 of debt at graduation composed of £37000 tuition fees+£8620 interest. Preferable over scenario 2 below as paying year 1 fees upfront saves 2.2k of interest.

Scenario 2; Getting full tuition fee loan but no maintenance= £52953 of debt comprised of £42140 fees+ £10813 interest

Scenario 3; Getting full tuition fee loan AND the maximum maintenance loan I am eligible for= £78730 of debt comprised of £62410 tution+ £16320 interest.

It seems to me that 1/2 would be the best option for me as I don't feel the maintenance loan would be of any benefit however, taking one seems to be the advice of most sources! Option 3 makes my eyes water!

Any advice would be greatly appreciated.

My apologies for the wall of text

newatc · 11 May 2018 at 11:46AM

It seems to me that the general advice of regarding the student loan as a graduate tax is correct. The only way you will pay it off is if you are earning megabucks in which case your strategy would have paid off anyway.
The logic for the maintenance loan should be the same though I guess the "debt" starts looking so big there is a psychological barrier.
I think it is worth noting, but not making it a major decision factor, that if a left labour government came in it is likely there will be some benefit to those with loans.

Pixie5740 · 11 May 2018 at 12:33PM

I take the opposite view. I had one of the plan 1 income contingent loans where the interest was 1% above the BOE base rate which was pretty cheap. I think the highest rate reached was only 4.8%. I guess I was just lucky that the BOE base rate was at an all time low and being in Scotland there were no tuition fees to pay so I have long since repaid my loans.

I would baulk at having to pay over 6% interest on such huge sums of money especially when you are likely to actually repay the loans since you are studying medicine. If you can get through your studies without the maintenance loans I would be inclined to do that, or if you could take the maintenance loans and invest the money but I'm not sure it would be worth the risk since the interest rates of the student loans are so high.

YourTurn · 11 May 2018 at 12:37PM

newatc wrote: »

It seems to me that the general advice of regarding the student loan as a graduate tax is correct. The only way you will pay it off is if you are earning megabucks in which case your strategy would have paid off anyway.
The logic for the maintenance loan should be the same though I guess the "debt" starts looking so big there is a psychological barrier.
I think it is worth noting, but not making it a major decision factor, that if a left labour government came in it is likely there will be some benefit to those with loans.

Thank you for your reply, I have considered the possibility of what might happen if the seemingly hard left labour government got into power imminently and the potential effect that may have but there isn't really much knowing.

I've also tried to quantify the megabucks idea too. Assuming everything went to plan as it does with most people, 10 years after medical school I'd be a consultant. At which point I'd be earning approximately 80K working full time for the NHS. In todays terms that would equate to paying back (80-25)*0.09= approx. 5,000 per year

YourTurn · 11 May 2018 at 12:45PM

Pixie5740 wrote: »

I take the opposite view. I had one of the plan 1 income contingent loans where the interest was 1% above the BOE base rate which was pretty cheap. I think the highest rate reached was only 4.8%. I guess I was just lucky that the BOE base rate was at an all time low and being in Scotland there were no tuition fees to pay so I have long since repaid my loans.

I would baulk at having to pay over 6% interest on such huge sums of money especially when you are likely to actually repay the loans since you are studying medicine. If you can get through your studies without the maintenance loans I would be inclined to do that, or if you could take the maintenance loans and invest the money but I'm not sure it would be worth the risk since the interest rates of the student loans are so high.

Yes it does make me feel a bit light headed. It's a valid point that persons studying medical degrees are perhaps the only people who are likely to repay their loan in full alongside dentistry students.

I did think about investing but the chance to earn greater than 6.1% in the current market would be really difficult. I have a Moneyfarm stocks and shares ISA which over the past year has earned 3% on the second highest level of risk (I don't keep anymore than 10% of my money in it though to protect myself).

Pixie5740 · 11 May 2018 at 1:19PM

There are a few professions where people stand a chance of repaying student loans, doctors, lawyers, engineers, actuaries, bankers (with a capital W). Then there are the ones who study game design and create the next GTA

. I suppose that's what you need to weigh up - how much of your student loans will you actually repay. If you won't end up repaying £45k of debt then it makes no difference if you owe £45k or £100k.

YourTurn · 11 May 2018 at 1:54PM

Pixie5740 wrote: »

There are a few professions where people stand a chance of repaying student loans, doctors, lawyers, engineers, actuaries, bankers (with a capital W). Then there are the ones who study game design and create the next GTA . I suppose that's what you need to weigh up - how much of your student loans will you actually repay. If you won't end up repaying £45k of debt then it makes no difference if you owe £45k or £100k.

OK, I've just made myself another depressing spreadsheet. Using current NHS pay scales using scenario one as an example and wrongly assuming that there wasn't a sliding scale and that debts continued to rise at 6.1% (which is only wrong up until 45k); the amount I'd owe would start at 45620, after 30 years, that figure would be reduced to 5439 and I'd have paid 128,798GBP. The amount I'd owe would start shrinking after 10 years peaking at 61644.

Disgustingly, if I went with scenario 3; the amount I'd owe would start at 78730, after 30 years I'd owe 189,814. Of course, I'd have paid the exact same total as in option one. My total balance would not drop at any point in that 30 year period.

Pixie5740 · 11 May 2018 at 1:58PM

In that case I revise my earlier opinion. If it makes not a blind bit off difference how much you borrow because you will end up repaying exactly the same amount with the rest being written off after 30 years you may as well borrow the maximum you can.

MallyGirl · 11 May 2018 at 2:28PM

I have done very similar calculations for my DD as she is looking to do a 5 or 6 year vet med course. Since vets don't earn anywhere near as much as people think (or as much as consultants) I calculated that the loan (fees plus minimum maintenance loan) would be written off at 30 years with her still owing £200k! At that point she would have to be earning £168,534 per year just to cover the interest (with the 9% contribution).It is basically 'funny money'.
As a doctor you might have the chance to make serious money - private practice - at which point having borrowed less will save you money. Otherwise flip a coin.

YourTurn · 11 May 2018 at 2:44PM

MallyGirl wrote: »

I have done very similar calculations for my DD as she is looking to do a 5 or 6 year vet med course. Since vets don't earn anywhere near as much as people think (or as much as consultants) I calculated that the loan (fees plus minimum maintenance loan) would be written off at 30 years with her still owing £200k! At that point she would have to be earning £168,534 per year just to cover the interest (with the 9% contribution).It is basically 'funny money'.
As a doctor you might have the chance to make serious money - private practice - at which point having borrowed less will save you money. Otherwise flip a coin.

It's quite depressing losing another 9% of your income on top of normal taxes and then 10% on pension too (although I appreciate you get that back in some form). I suppose this is just the life of a millennial isn't it haha.

MallyGirl · 11 May 2018 at 3:06PM

It is pretty depressing - and sad that my 16 yo is having to worry about such things. Like your chosen subject hers is a vocational degree to lead to a specific, and necessary, profession. I went to uni when no fees were charged back and I got a full grant - I came out in a good financial state and bought my first flat at 24. That just won't be possible for her

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