UK university student finance - should I use my sponsorship money to pay the debt?

Question

I am in the fortunate situation of having both an unconditional offer for a (UK) university I really want to go to, and a sponsorship offer from the company that I have worked for in my gap year, in return for me working for them for 2-5 years after. However they haven't sponsored anyone since the changes to the UK tuition fees, and we're both unsure of the best way to way to do it.

Ignoring sponsorship money (a few thousand pounds per year), my 4 year course will cost £36000, which I will take out a tuition fee loan for. I have the option of taking out about £15000 in maintenance loan over the 4 years too. I would later pay some of these 2 loans back to SFE at 9% of everything I earn each year over £21000, for 30 years after I finish uni. It's predicted that pretty much no-one will ever pay their whole loan back, and calculations that I've done seem to confirm this. The debt is linked to RPI + 3% so I'll probably end the 30 years more in debt than I started. To complicate matters, I have about £5K of savings from this year and will be working each summer holiday for the company that is sponsoring me. I think I could comfortably save £2.5K of my earnings each summer.

Bearing all of this in mind, would I be best to:

a) Not take out a maintenance loan and instead live off my sponsorship money and earnings, still taking out the tuition fee loan.

b) Take out all of the loans anyway, and stick the sponsorship money and any leftover summer job money in a savings account for a house or something. (This is what my family recommend I do!)

c) Use my current savings, summer job money and sponsorship money to pay as much of the tuition fees as I can afford, meaning I would have a small and manageable amount of debt and could hopefully stop having to pay the monthly <9% after a number of years.

d) Something different.

It's a weird system we have here, where the debt pretty much ends up like taxation and throwing sponsorship money at it could potentially make no difference to what I end up paying back. I'd be grateful to know people's thoughts.

Answer 1

Let me run some simplistic numbers, ignoring inflation. You have the opportunity to borrow up to 51K. What matters (and varies) is your postgraduation salary.

Case 1 - you make 22K after graduation. You pay back 90 a year for 30 years, paying off at most 2700 of the loan. In this case, whether you borrow 2,800 or 28,000 makes no difference to the paying-off. You would do best to borrow as much as you possibly can, treating it as a grant.

Case 2 - you make 100K after graduation. You pay back over 7K a year. If you borrowed the full 51, after 7 or 8 years it would be paid off (yeah, yeah, inflation, interest, but maybe that might make it 9 years.) In this case, the more you borrow the more you have to pay back, but you can easily pay it back, so you don't care. Invest your sponsorships and savings into something long term since you know you won't be needing to draw on them.

Case 3 - you make 30K after graduation. Here, the payments you have to make actually impact how much disposable income you have. You pay back 810 a year, and over 30 years that's about 25K of principal. It will be less if you account for some (even most) of the payment going to interest, not principal. Anything you borrow above 25K (or the lower, more accurate amount) is "free". If you borrow substantially less than that (by using your sponsorship, savings, and summer job) you may be able to stop paying sooner than 30 years. But even if you borrow only 12K (or half the more accurate number), it will still be 15 years of payments.

Running slightly more realistic versions of these calculations where your salary goes up, and you take interest into account, I think you will discover, for each possible salary path, a number that represents how much of your loan is really loan: everything above that is actually a grant you do not pay back. The less you are likely to make, the more of it is really grant.

On top of that, it seems to me that no matter the loan/grant ratio, "borrow as much as you can from this rather bizarre source" appears to be the correct answer. In the cases where it's all loan, you have a lot of income and don't care much about this loan payment. Borrowing the whole 51K lets you invest all the money you get while you're a student, and you can use the returns on those investments to make the loan payments.

Answer 2

Borrow the lot (as your family recommended)! The extra money will come in useful when you want to buy a house and move back to the area where your employer is.

The government loan in the UK is a fantastic system, just a shame they are charging you so much in tuition fees...