Don't pay uni fees upfront Many may end up wasting £20,000+

£9,000-a-year tuition fees sent chills down many parents' spines. Some are desperate to build uni funds to protect kids from huge debts on graduation. This laudable aim could be throwing away over £20,000.

Many students won't need repay anything close to their tuition fees price, if so paying upfront is a waste. This guide has special calculators to help, and if it doesn't add up provides alternative ways to help your children.

We assume below it's parents with the cash – but the logic also applies if it's the students themselves.

A laudable aim gone wrong

"We've a great story. A girl's saved up nearly £30,000, so her parents don't have to borrow for her £9,000 tuition fees – she's a role model."

I almost shivered with fear when a journalist told me this. While it's bravo for the saving habit, the idea of this being a role model to follow couldn't be further off the financial mark for many. It's a symptom of the widespread misunderstanding of the changes to English student finance in 2012.

No parents 'HAVE TO borrow for tuition fees' – the fees aren't for parents to pay for. First-time undergraduates get them paid for them by the Student Loans Company and only repay them if they earn enough after graduation. (If you're saying "but I don't want my kids to be in debt", please read it's more like an extra tax not a loan in our Student Loans 2012 guide).

The nightmare scenario – borrowing elsewhere to fund fees

However, the bit that really scared the begeebees out of me was the thought that her parents, or any, were planning to take commercial borrowing so she did not have to get a student loan. Here's just a few reasons why student loans are a better system of borrowing than commercial debt:

• Student loans don't go on credit files.
• Student loans repayments are proportionate to income.
• Lose your job/ take time off, so you've no income, and you don't need repay student loans.
• Student loans don't employ debt collectors and won't chase you.
• You can't lose your house if student loans aren't repaid (unlike secured debts).

So, structurally, they're far better than other debts, but the interest rate is also relatively low, as it's set at between inflation and inflation + 3%, depending on earnings. Over the long run this is likely to be far cheaper than loans or credit cards.

The only commercial debt that may compete on rate is adding it to a mortgage, though that's only for higher earners (and has its own dangers – see {should I shift debts to my mortgage} guide).

Yet even ignoring all this and assuming the cash is sitting around anyway, as I'll explain, financial maths shows in many cases you're better off taking the loan and not repaying the fees in full.

2012 Student Loans: the basics

Student loans are a bizarre contradiction. Everyone talks about the price tag – which for many students could be over £50,000 after graduation, once you add up tuition fees and maintenance loans.

Yet the repayment system and interest charges mean that figure bears no resemblance to the actual amount repaid.

Full time students start repaying student loans and the interest in the April following graduation; the repayments are solely based on earnings, not on the amount borrowed. The key fact is ...

You repay 9% of everything earned over £21,000, though it's wiped after 30 years regardless. If you never earn above £21,000, you never repay.

This £21,000 threshold will rise with average earning from 2017, so as people earn more, the threshold goes up.

This is just a snapshot of the system. For a full briefing, read
Students 2012 – the facts, not the myths

The calculations:Many will be paying unnecessarily

Now you know how the system works (if not, first read the bit above) the best way to explain why paying up front could lose you money is to give three example scenarios.

Safer alternatives to paying off the fees

As the three scenarios show, for many on low to even relatively high salaries, it'd be a waste of money to pay upfront. For those on very high salaries, it'd be a big mistake not to.

And that's the problem: this is very unsure, and short of employing a crystal ball it's very difficult to work out what'll happen to your children's future salary. Even someone aiming for a high flying profession like a doctor or barrister may change their mind, not get the grades, work for a charity, go into local politics or decide to become a full-time parent.

• Simply put the money aside until you've more info
  
  Therefore, a simple strategy is to put the cash aside in a Top Cash ISA or Top Savings Account until after graduation. Then you'll have a much better idea of earning potential and whether you should pay it off there and then.
  
  There is a cost to doing this. The interest charged to 2012 students is inflation (RPI) plus 3% during the time they're studying. Though it'll only be a few years, and is partially offset by the interest earned on savings.
  
  Weighed up against the risk that you end up repaying the debt unnecessarily, it's not too large. So putting the cash away until you know the earnings strategy has a cost, but not a huge one.
  
  However, if your child is absolutely, undoubtably, guaranteed to earn a big salary on graduation, and you have the cash now, then it may be worth avoiding this interest cost.
  
  It's also worth noting that if a graduate had large savings in their name after they leave university, it's possible that could reduce their entitlement to certain state benefits.
  
  Thankfully the other issue that could’ve affected this was a proposal for the Government to add large penalties for those clearing the new 2012 student loans or overpaying them. Yet in February 2012 that was ditched so isn’t a concern any more (see our consultation submission against penalties for why we thought it a bad idea).
• Paying upfront may leave less cash for worse debts
  
  Even if your child is likely to be a high earning graduate, that still doesn't necessarily make it the best use of your cash.
  
  After studying many want to go on to buy a house or perhaps get a loan for a car (mature students who've done this and won't ever need to borrow skip on past).
  
  While a mortgage is likely to be at a roughly similar rate to student loans, this money could provide a substantial deposit that could enable much cheaper mortgage borrowing and save a large amount in the long run.
  
  Plus, when losing a job or taking a break from work, unlike a student loan, mortgage companies still come asking for the cash and could take a home if it's not being paid. So reduced mortgage borrowing is likely to be preferable for most.
  
  Compared to long term car loan or credit card borrowing, the student loan is likely to be substantially cheaper. So using the cash to avoid a student loan, only to effectively borrow back some or all of it from a commercial lender later, isn't a sensible strategy.
  
  However, if you're seriously cash rich, so you can repay your potentially high earning child's student loan and provide a mortgage deposit and a car without needing to borrow yourself, then it's not such a problem.

Of course, my focus has solely been on the clinical financial mathematics. However that isn't the be-all and end-all. People often say they don't like the concept of 'debt hanging over them'. While that is understandable, as it can be a very expensive issue it's worth reading think of it like an extra tax.

There's a second issue here: some may feel is a point of principle too. When I write 'it's money you may never repay', if you don't repay, of course, someone else has to and that someone else is the UK's Treasury (ie, taxpayers). How that sits with you is a question of your own ethics.