The First-Time Buyer Who Used Her Student Loan to Buy Her First Home

Like most students, Charlie Hyde loved university life. She lived with friends, enjoyed her English literature degree, spent her evenings at comedy gigs and made great memories.

Unlike most students, she also spent the three years saving and investing a large chunk of her student loan so that she could build up a house deposit.

By adding the cash she made from her part-time job and benefiting from investment growth, she had £37,500 by the end of university.

Hyde, now 27, said: "I realised I was never going to get a 'free' money influx like this ever again, so I decided I would try to save as much of it as possible to give myself a leg-up."

She was able to buy a one-bedroom flat in Isleworth, west London, two years after graduating.

Anyone going to university can take out a student loan to cover the cost of tuition fees — typically £9,250 a year for three years, so £27,750. This money is sent directly to the university.

On top of this students are assessed for how much money they can borrow for living expenses, in the form of a maintenance loan of up to £12,382 a year for those living away from home. What you get depends on your parents’ income and where you attend university.

Means testing does not apply in Wales and the system is dierent in Scotland and Northern Ireland too.

University forums are packed with students asking for advice on whether to take the maintenance loan for investment purposes. Many have made the shrewd calculation that they could be better o in the long run by using the cash to invest, even if they have to repay it.

When Hyde started at University College London in 2012, she had a maintenance loan of £9,300 a year and a £2,000 bursary, giving her an annual income of £11,300.

She spent £620 a month on rent, about £120 on food and going out, £80 on bills and the same again on transport, giving her total living costs of about £7,500 for the university year.

She spent £6,000 of her loans and topped up the rest with a part-time job. To keep costs down she walked or cycled, went to free events and “drank a lot of tap water in pubs”. The remaining £5,300 a year, plus any extra earnings she didn’t spend, she split between a stocks and shares Isa and Santander’s 1/2/3 account, which at the time oered 3 per cent interest. Her Isa held medium-risk investments that she hoped would return 6 per cent a year. Summer jobs or paid internships also boosted her savings by about £3,000 a year. In total Hyde saved £10,800 a year at university that gained interest or investment growth.

“It isn’t for everyone, but I wanted to use the cash to give myself the foundation for financial security,” said Hyde, who now pays £300 a month in student loan repayments and is likely to pay back the whole of her tuition and maintenance loans. She still thinks it was worth doing.

Not all students will have to pay back the whole amount because repayments are set at a proportion of your salary and the debt is written off after 30 years.

“You need to work out if it makes sense for you, balancing the gain against the amount you’ll be paying back, which racks up the more you earn. Can you get higher returns investing than the amount you pay back?” said Hyde.

As a general rule of thumb borrowing money to invest (known as leveraging) is not a smart idea. If you start making losses you will not only have to repay the money you originally borrowed, but also the interest accrued on it.

When you take out a student loan, interest of 4.1 per cent is applied immediately until you graduate. Once you start earning, the interest rate depends on your salary. The more you earn, the higher the interest rate.

You don’t start repaying a student loan until you earn £27,295 a year, although the government is thinking of lowering this threshold. Up to this level you are charged an interest rate tied to the retail prices index (RPI) rate of inflation. The rate is set on September 1 every year based on RPI from the previous March (for 2021 this was 1.5 per cent).

The rate increases on a rising scale for earnings over £27,296 until it hits a maximum rate of RPI plus 3 percentage points (so 4.5 per cent) once you earn £49,130.

If you were planning on borrowing money to invest through a normal loan, you would need to ensure that your investment returns net of charges averaged more than the interest payable on the loan. But when it comes to student loans, the interest matters less. This is because what you repay is based on what you earn, not what you have borrowed.

Graduates have to pay back 9 per cent of any salary earned above £27,295. They keep having this deducted from their pay until they have repaid all their debt, or for 30 years after they graduate, whichever is sooner.

That is why many people view student loans as a graduate tax, rather than a loan. If you never earn more than £27,296 you never pay it back, and only 22 per cent of graduates are expected to pay o their whole loan, according to the Institute of Fiscal Studies.

To work out whether it is worth investing a loan, you need to consider how much of it you think you will have to pay back. If you are never going to clear the tuition fee part of your student debt (plus interest) then, essentially, the maintenance loan would be free money.

If you graduated in 2021 on a starting salary of £35,000 and had pay rises of 2.5 per cent a year, you would repay your tuition fee debt (not the maintenance loan) after 29 years, according to AJ Bell, a wealth manager. That would be just a year before it would be wiped clear anyway.

This salary is the tipping point: anything more than a starting salary of £35,000, increasing by 2.5 per cent yearly, will mean that you will start to make a dent in the maintenance loan debt before the 30-year deadline.

Laura Suter from AJ Bell said: “If you don’t need the maintenance loan to live on, it could provide a handy nest egg for the future. The logic is sound. For many graduates £35,000 will seem like a pipe dream of a starting salary, so if you really don’t think you will ever get to a position to pay back all your loan then investing it could be a no-brainer.”

If you had a maintenance loan of £6,000 and used it to invest the maximum £4,000 into a Lifetime Isa (which pays a 25 per cent government bonus) and £2,000 in a stocks and shares Isa each year for three years of university, you would have made £29,905 after ten years, assuming 4 per cent investment growth and including charges, according to AJ Bell.

After 20 years you would have made £44,267, and after 30 years £65,525 — all from “free” money, if you never pay o this part of your loan.

All these calculations would be invalid, though, if the government lowers the student loan repayment threshold.

Rebecca O’Connor from the wealth manager Interactive Investor said: “Anyone investing for the first time has to be aware of the risk, particularly if you are investing in individual stocks or experimenting with cryptocurrency. You run the real risk that you could end up down on the deal and paying for it later on.”

After university Hyde landed a graduate job as a tech consultant and saved a further £34,750 over two years by living at home and paying a reduced rent.

She put her £72,250 savings and inheritance of about £28,000 down as a deposit on a one-bedroom flat near where she grew up. She estimates that about £30,000 of her savings came from investing her student maintenance loan.

Hyde said: “The secret behind all of this is compound interest. It’s your best friend, especially if you’re risk averse. I also saved aggressively, which is a short-term sacrifice for long-term gain. I still went out and had fun, but the loan was a solid foundation to build on.”