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Can you beat the student loan system by investing the money instead? 

Cambridge University students in gowns on graduation day at Corpus Christi College, England
The maximum amount most students could invest would be £26,588 but is it worth it? Credit: Corbis NX/P A Thompson 

Tuition fees as high as £9,250 a year most often grab the headlines, but it is living costs where there is more room for manoeuver and a chance to effectively live for free.

Most students starting in September can borrow up to £8,700 a year, rising to £8,944 next April. For those studying in London it is higher.

Unlike tuition fees, which are only released direct to the university, the maintenance loan is paid three times a year, at the start of each term, into the student’s bank account.

But what if you invested that money rather than spent it? 

You would need some other way to pay your living costs during your time at university, either by working part-time or having your parents pay. At the end though, you may be able to hand back that investment with interest.

The maximum amount most students – those living away from home, outside London – could invest would be £26,588. This would have to be drip fed into any investment at around £2,933 per term, three times a year, over the three years. Roughly that is £733 a month.

Putting that in the best instant-access savings account – from Marcus by Goldman Sachs, which pays 1.45pc – would generate a return of £599 over three years.

Locking it away for five years in the best fixed-rate bond from Gatehouse Bank, paying 2.45pc, would give £1,022.

Alternatively, in an investment Isa the possible gain after paying in monthly for three years, assuming charges of 0.75pc and a 4.5pc return, could be £1,541. In riskier investments – paying 7.5pc – this could rise to £2,818.

How does this compare with the cost of repaying the maintenance loan – in other words, is it worth it?

Interest is payable on the student loan at a rate that works on a sliding scale, ranging from the RPI measure of inflation to RPI plus three percentage points. 

The rate is based on RPI as recorded in March of each year, which this year was 3.3pc. This means the range of interest payable on the loan is between 3.3pc and 6.3pc – significantly higher than mortgage or savings rates. A slight drop in inflation means the top rate of interest will fall next April to 5.4pc.

The scale is dictated by earnings. Those earning under the relevant repayment earnings threshold – £25,725 for current graduates, rising to £26,575 from April 2020 – will be charged RPI only. The extra three percentage points are added for those earning more than £46,305, rising to £47,835 from April.

Any returns from investing the maintenance loan would have to be higher than the interest being paid – so would have to generate more than 5.4pc a year. 

One quirk to be aware of is that students will be charged the maximum interest rate while they are still studying. This means that about £2,646 worth of interest will have amassed on the loan during the three-year university degree, before they start earning. 

The only way to offset this before graduation would be to invest the student loan in a higher risk investment Isa. If it made returns of 7.5pc a year you would beat the system and even make a small gain of £200. 

However, riskier investment can be volatile, particularly over such a short time frame, meaning you could get back less than you put in.

With the other savings options some of the cost in interest would be clawed back, but not all.

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