The Student Loan Conundrum

(Warning – this one’s a little “techy”... but stay with me!)

At this time of year, many families find themselves deep in A-Level season. Naturally, thoughts start turning to university life: tuition costs, living arrangements, one-pot student recipes... and, for some, how soon the newly vacated bedroom can be let out without looking too keen.

While our own household won’t face this until next year - Deo Volente - a recent client query got me thinking about a situation that’s quietly relevant for many families planning for their children or grandchildren’s higher education.

The question was this:

“Is it cost-effective - or even sensible - to take out an official Student Loan for Tuition Fees and Maintenance, even if the student, or family members, are in a position to cover the full cost from their own resources?”

You can almost hear Excel firing up already!

So, I set myself the task of exploring this properly: if you have earmarked funds to fully cover university costs, is it better to give that money directly to the student (to be carefully saved and invested for the future) while letting the Student Loan do its thing - paying the tuition and maintenance along the way? Or is there a hidden financial catch?

Let’s break it down.

First, some groundwork. As a Chester-based financial planner, I focused on the rules for students from England:

• Tuition Fees Loan: up to £9,535 per year
• Maintenance Loan: ranging from £3,907 to £13,762 depending on household income and university location

That means a minimum borrowing of £13,442 in year one. Assuming fees and loans rise by inflation, years two and three could see borrowing of £13,778 and £14,123 respectively - adding up to £41,343 total borrowed across three years.

But crucially, the benefactor’s original pot of £41,343 remains untouched (and potentially invested), waiting in the wings for future use - first big tick.

The Costs and Benefits: A Financial Planner’s View

• Loan Interest: charged at RPI (Retail Price Index) - essentially inflation-linked. Meanwhile, the family’s funds could (in theory) be invested for a return higher than inflation - depending on risk appetite and investment choices.
• Repayments: begin only once the graduate earns above £25,000 a year (the current threshold), and even then are only 9% of income above that threshold.
• Write-Off Potential: any outstanding loan balance is wiped clean after 40 years.
• No impact on credit score: student loans don’t appear on credit files, though repayments may be factored into mortgage affordability checks later.

So what’s the potential upside of borrowing, even when you don’t need to?

1. Ultra-low repayments: far cheaper than any commercial loan
2. Future flexibility: the family’s funds stay invested for long-term goals - first home or flat deposit, car, travel, rainy day fund...
3. Potential loan write-off: in some scenarios, substantial sums could be written off, boosting the value of the family’s investments over time

Let’s take a couple of worked examples (caveat: simplified, but helpful for illustration):

• Low earner scenario: graduate earns below the threshold for 40 years (or takes extended career breaks). The invested fund could grow to £337,000 (assuming 5% annual return), while the full student loan - potentially £120,000 with inflation - gets written off.
• Modest earner scenario: starts at £35,000 pa. Around £68,000 repaid over 40 years, loan balance of £10,154 written off, and the invested fund could still reach £337,000.
• High earner scenario: starts at £50,000 pa. Loan fully repaid in around 18 years at a total repayment cost of £52,000, but the invested family pot might still reach £110,000.

Naturally, real life is messier. Will the “set-aside” pot remain untouched for decades? Probably not. Will market returns be this smooth? Unlikely. But the arithmetic suggests that, for some, taking the Student Loan - even if you could pay upfront - might prove a savvy long-term financial strategy.

And then comes the real financial planning question:

Where exactly would you invest the untouched pot? How does this fit into your family’s bigger financial picture - property plans, gifting, inheritance tax considerations?

These are conversations well worth having. Whether you’re just starting to save for a child's or grandchild’s education, or if you’re about to send them off to Uni this year, why not come and chat with the team here in Chester? We’ll help you make sense of your options and build a plan that fits your wider financial goals.

Gareth

P.S. Thanks, M - you know who you are!