Beware paying uni fees upfront

Beware paying uni fees upfront

Many may end up wasting £20,000+

With £9,250-a-year tuition fees, many parents are desperate to build uni funds to protect kids from huge debts. But this laudable aim could be throwing away over £25,000. Many students won't need to repay anything close to the cost of their tuition fees. If that's the case, paying upfront is a waste. This guide shows you how it works.

We assume below it's parents with the cash – but the logic also applies if it's the students themselves. This guide refers to post-2012 Plan 2 student loans.

The Government has released its Augar report on further and higher education, which has been influenced by suggestions from MSE and Martin Lewis. Read Martin's editorial comment for more in-depth analysis of what the suggested changes really mean.

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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."

We almost shivered with fear when a journalist told us this. Bravo for the saving habit, but 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.

Parents don't HAVE TO borrow for tuition fees - the fees aren't for parents to pay for. First-time undergraduates get them paid for by the Student Loans Company, and only repay 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 Mythbusting guide).

Sadly, many Muslim students in England can’t get student loans, as while there were plans in 2014 to have Sharia compliant loans, the Government has not delivered it. 

The nightmare scenario – borrowing elsewhere to fund fees

However, the bit that really scared the bejesus out of us was the thought that her parents, or anyone else's parents, were planning to take commercial borrowing so she didn't 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 your credit report.

  • Student loan repayments are proportionate to income.

  • If you lose your job or take time off, so you've no income, you don't need to repay student loans.

  • While if you can’t pay normal debts you could see debt collectors at your door – with student loans this isn’t an issue as most people pay them via the payroll. Though if you're self-employed/those paying via self-assessment you could be sent debt collectors if you resist all SLC's other efforts to collect debt.

  • You can't lose your house if student loans aren't repaid (unlike secured debts).

Structurally, they're far better than other debts, but the interest rate is also relatively low, as it's set 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. But that's only for higher earners, and has its own dangers too.

Even if you ignore all this and 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.

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Student loans: the basics

Student loans are a bizarre contradiction. Everyone talks about the price tag, which, for many students in England who started studies in 2012 or later, 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 £27,295, though it's wiped after 30 years, regardless. If you never earn above £27,295, you'll never repay.

If you started university in England or Wales in or after 2012 you may also know that the current rate of student loan interest is 6.9% as of 1 March 2023 - but that's not something to panic about. See Martin Lewis' Panic or Pay it off? guide for more.

This is just a snapshot of the system. For a full briefing, read Student Loan Mythbusting.

The calculations: Many will be paying unnecessarily

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

Scenario 1:

You pay the fees, your child never earns above the threshold


YOU LOSE £27,750

At the maximum £9,250-a-year fees level, the total three-year cost to pay upfront is £27,750. In the extreme case that your child graduates and becomes a low-paid artist, part-time social worker, full-time parent, dies, or in any other scenario where they never earn over the threshold, they'd never need to repay a penny.

That means you've paid £27,750 that would have never needed paying back.

Scenario 2:

You pay the fees, your child has average graduate income


YOU LOSE UP TO £30,000

This is perhaps the most shocking scenario. I'll be honest - when I first did the calculations, I didn't believe the scale of the loss.

The scenario here is a graduate who starts on a decent salary of £25,000 and sees this rise each year at 2% above inflation.

To work out the result, I plugged the data into MSE's student loans calculator. It's well worth you playing with it to work out your own scenario and try different assumptions (it's fun, honestly) to see the impact.

TABLE_CELL_STYLE Three-year price
(the amount borrowed)
Total repayment 
(factoring out inflation)
Tuition fee £9,250/year only £27,750 £23,000
Maintenance loan £8,430/year only £25,290 £23,000
Tuition fee + maintenance £53,040 £23,000
This is an estimate designed to show the scale. Use the student loans calculator to generate your own answers. 

Important: Repayment calculations are based on someone who starts work immediately following graduation and keeps going for 30 years. Any time off from work lowers the amount repaid (and in this case, increases the loss of paying upfront).

Those are the numbers, this is their impact...

  • Only planning to borrow fees (not maintenance loan) – LOSS £4,750.

    Pay upfront and you'd have paid around £4,000 more than the total repayments over 30 years before the debt wipes. (This is calculated at current prices, as by pre-paying you're paying the loan off at current prices).

  • Take out the maintenance loan, but pay fees upfront – LOSS £27,750.

    The cost of repaying the maintenance loan alone is £23,000, yet getting a tuition fee loan on top doesn't add to your repayments. So you're not actually paying any more, rather than paying £27,750 upfront.

    Want to know why repayments are identical for 'tuition fees', 'maintenance' and 'tuition fees & maintenance'? It's because monthly repayments are based only on earnings, not borrowing. The maximum repayments on those earnings is £23,000, so adding more borrowing doesn't add to it.

    Play with the calculator and it'll soon become obvious.

Scenario 3:

You pay the fees, your child earns big bucks


YOU GAIN UP TO £32,500

If your child gains employment at a starting salary of £35,000 and sees this rise heavily each year at 4% above inflation, here are the stats:

TABLE_CELL_STYLE Three-year price 
(the amount borrowed)
Total repayment
(factoring out inflation)
Tuition fee £9,250/year only £27,750 £42,500
Maintenance loan £8,340/year only £25,290 £35,800
Tuition fee + maintentance £53,040 £96,000
This is an estimate designed to show the scale. Use the student loans calculator to generate your own answers. 

Important: Repayment calculations are based on someone who starts work immediately following graduation and keeps going for 30 years. Any time off from work lowers the amount repaid (and in this case, decreases the gain of paying upfront).

Here's the impact of those numbers:

  • Only planning to borrow fees (not maintenance loan) – SAVE £14,800.

    Here you repay more than you borrowed, even at current prices, due to the interest (student loan interest rises when you earn above £27,295, reaching a maximum of inflation plus 3% at £49,130 earnings). So paying off the fees if this happens would beat taking out a loan.

  • Take out the maintenance loan, but pay fees upfront – SAVE £32,500.

    If you pay the tuition fees, but your child takes a maintenance loan, it would cost £35,800 in loan repayments, as well as £27,750 in upfront tuition fees. Taking loans for both would take even longer to repay and add even more interest, costing £96,000 overall instead of £63,500. So you'd gain more by paying the fees upfront.

Safer alternatives to paying the fees

For many on low to even relatively high salaries, it'd be a waste of money to pay upfront. But 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 in, for example, medicine or the law, may change their mind, not get the grades, or opt to work for a charity, go into local politics or decide to become a full-time parent instead.

  • Simply put the money aside until you know more about the future

    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 off the loans there and then.

    There is a cost to doing this. The interest charged to students starting in 2012 or after is inflation (RPI) plus 3% during the time they're studying. However, it'll only be for a few years, and is partially offset by the interest earned on savings.

    Weighed up against the risk you'll 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, undoubtedly, 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 has large savings in their name after they leave university, it's possible it could reduce their entitlement to certain state benefits.

  • 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 will want to buy a house or perhaps get a loan for a car. (Mature students who've done this already and won't ever need to borrow can skip past this section).

    While a mortgage is likely to be at a roughly similar rate to student loans, money used to pay off student loans 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 will still come asking for the cash and they could take a home if it's not being paid. So reduced mortgage borrowing is likely to be preferable for most.

    Compared to a 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.

The moral hazard

Please don't take this as an essay on why you shouldn't save up for your children. That's not my point. It's whether the use of that cash is best served by paying their student loan.

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". That's understandable, as it can be a very expensive issue.

But it's worth reading this: Think Of It Like An Extra Tax.

There's a second issue here. Some may feel it's 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. That someone else is the UK's Treasury - taxpayers. How that sits with you is a question of your own ethics.

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