Last September, my 17-year-old daughter Ella dropped a bombshell – she wanted to go to university next year. This was a complete surprise, especially since she had been adamant about preferring an apprenticeship. But her passion for Pharmaceutical & Cosmetic Science changed her mind, and we embarked on the journey to figure out the next steps.
The confusion begins
After extensively researching her options, we narrowed it down to two universities, Liverpool and Sunderland, and the UCAS form was submitted. The next challenge was figuring out the costs, payment methods and the best way to fund her education.
Tuition fees
Our initial research revealed that tuition costs are £9,535 per year for three years. Ella falls under the ‘Plan 5’ cohort, the fifth version since tuition fees were introduced in 1998. We had two options: pay the fees ourselves or get a tuition loan, which is paid directly to the university to ensure it’s not spent on other aspects of student life. If she took the loan, it would accrue interest from day one at the rate set by RPI in the previous March, currently 3.62%. This means that after three years, Ella would owe £31,886 in the unlikely event RPI doesn’t change, and this is the option she is going to take.
Maintenance loans
With tuition costs sorted, we turned our attention to living expenses. The government offers a maintenance loan, with a maximum of £10,544 and a minimum of £4,915 per annum, means-tested against our household income. Since our total household income is above £62,000, Ella qualifies for the minimum loan of £4,915 per year to cover food, accommodation and other living expenses, and that’s before socialising is factored in! The interest on this loan is also based on RPI from day one, potentially amounting to £16,436 after three years.
Accommodation & other costs
The government expects individuals to cover any excess costs. For Ella, this means a combination of her working and our financial help. At her preferred university in Liverpool, annual rent ranges from £3,780 to £7,140. Naturally, the most expensive option was the most appealing in terms of location, facilities and overall living standards. Our plan is for Ella to fund the difference between maintenance costs and accommodation costs through savings and part-time work. We will cover her other living expenses, which might be the biggest bill of all, given her spending habits on brands like Hollister, Whispering Angel and Starbucks!
Post-university and repaying the loan
Assuming Ella passes her course, she will graduate with a degree as well as a number of loans amounting to c.£48k. Repayment isn’t optional, but she would only start repaying once her income exceeds £25,000. If she lands a job in cosmetic science, with the average entry-level salary of £29,500, she would repay 9% of the amount exceeding the £25,000 threshold, which is £4,500. This means she would repay £405 annually, but with the interest rate at 3.62%, the outstanding loan would still grow by over £1,300 each year.
How best to repay?
The good news is that any unpaid loans are written off after 40 years, so roll on 2069! The loans don’t affect creditworthiness for mortgages but can impact affordability. Most people will just incorporate the monthly repayment into their normal expenses, but what if you have cash available?
Using a government gateway account, you can make additional repayments to reduce the loan term, though it won’t lower the monthly payment. In Ella’s case, she inherited £24,000 in 2013, which has grown to just over £50,000 thanks to the excellent work of the investment team at Equilibrium. She could theoretically repay the loan immediately, but these funds were earmarked for a house deposit and possibly some travelling. However, what if she used some of the cash to pay off the loan and kept a minimum deposit of £10,000?
My thoughts
To me, in Ella’s financial position and knowing her plans, not using the capital to pay off the student loan at this time seems like a no-brainer for several reasons:
- Borrowing an additional £40,000 for a mortgage at an interest rate of 4.39% to pay off a student loan charging 3.62% is illogical.
- With a small deposit and an entry-level wage of £29,500, her options for buying a house would be limited.
- Having an accessible sum gives her options. Before deciding when to buy a house, she could travel, buy a car and enjoy life without the burden of a mortgage.
- While the funds are invested, they could potentially grow at a rate higher than the interest charged. This isn’t guaranteed, but by allocating amounts into different risk profiles based on when they might be needed, volatility could be reduced.
To point out, these are my circumstances and thoughts. Everyone’s financial situation and beliefs are different. Some might prefer to fund a house deposit and pay off the loan, while others might want their children to start off debt-free and make their own way onto the property ladder. Those who have sufficient savings may pay the fees upfront and, therefore, eradicate the need for any type of finance. The list of potential questions and options is endless, but with the help of one of our financial planners, you can find the solution that fits your family best, both now and in the future.
This blog is intended as an informative piece and should not be construed as advice. If you have any further questions, please don’t hesitate to get in touch with us using the form below or by reaching out to your usual Equilibrium contact.
