Should You Take Out a Student Loan?

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Students in the UK currently face tuition fees of up to £9000 a year, almost triple what they were a few years ago. While the increase put a few off attending, most have opted to grin and bear it after student attempts to stop the increase back in 2010 failed to change the government’s decision. For parents who have diligently saved through their lives there might be the money available to send their child to university debt free: but should they?

Student loans have traditionally been at super low interest rates, only slightly above inflation. Currently the rate is up to 3 percent above the Retail Price Index (source), which is hovering around 3.1% currently. This is different to how most loans work, which use the Bank of England interest rate as a base. With the Bank of England interest rate at historic lows, students aren’t able to benefit and are instead being charged a similar interest rate to before the financial crisis as inflation has remained at similar levels.

Even at 6.1%, the interest is substantially lower than what’s offered by almost every bank loan – and substantially lower than bank issued credit cards, short term lenders, overdraft and short term financing. And there’s an additional benefit: if you don’t earn £21,000 a year you won’t have to make any payments, and after 30 years what you owe is written off. Anything over £21,000 is effectively taxed at 9% until the loan is repaid.

Unlike other debts the risks involved with defaults, late repayment charges, and interest rate hikes are practically none issues. The only people who ever fall behind on student loan payments are the self-employed who have managed their finances badly. For the vast majority the student loan is simply a tax, and one that almost every young person will be paying.

Student loans aren’t perfect though and it’s understandable why some parents prefer to pay their child’s tuition fees directly. Even the low interest rates on student loans are still double what the best savings accounts will offer, so using savings to pay off loans early makes sense for the current crop of students.

There’s also recently been talk of interest rates on existing loans being increased. Many thought that interest rates were stuck for life, and the potential for an increase has angered many. The response to the suggestion is somewhat promising however – it shows student loans are not simply a financial issue but also political, and governments could in future win or lose elections based on how they treat those with loans.

Parents considering using savings to pay their child’s university fees should first look to alternative uses for the money. Giving their child a grant to get started in life after university such as help to get on the property ladder or start a business could be far better use of the money. Putting it towards a deposit on a mortgage could help them save far more in money that would be wasted renting.

Only if you’ve got the fund to cover both giving your child a great start to life and paying off their loans should you consider this option. Even then you could find a better use for the money: any investment with a yield that can beat the student loan interest rate would be a better option. One of the lowest risk easiest investments which can beat the student loan interest rate is property that is only available to cash buyers. Flats above shops or in buildings of non-standard construction will often achieve yields above 10% and as a bonus will give your son or daughter an insight into the profitable property industry.

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One Response

  1. This is a good question which just about every student faced at some point. It really depends on the individual situation. In general most college degrees are not worth the cost if compared with debt students have to take and what they end up earning. There are exceptions of course and many professions require a college degree.

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