The student loan trick that could earn you thousands in just three years

For many parents the goal is to send their children to university without them having to take out a student loan that will leave them heavily in debt.

In the past 25 years, students have gone from paying nothing for higher education, to paying off their student loan for the whole of their working life – but there might be a way to make the loans work for you.

Students can claim tuition fee loans to cover the university teaching costs – these are up to £9,250 a year – plus maintenance fees, which cover living expenses. These will vary depending on whether you live at university, and where you are based. If you’re lucky enough to have the financial support to cover your maintenance costs without the loan, there is a way to turn this loan into an investment.

Maintenance loans, sometimes referred to as living loans, are available to students to support their living costs while at university. They are means tested up to a household income of £58,291, however there is a minimum amount available to all students regardless of their household wealth.

Current students this year are able to receive a minimum of £ 4,524, or £ 6,308 if studying in London, and if they live at home it is £3,597. Next year, all of these amounts are set to rise by 5.37pc to match inflation.

What this means in practical terms is that in the three years students are at university, they have the opportunity to borrow up to £ 19,734. The loan is charged interest, capped at 7.6pc and the interest rate is calculated each new academic year by tracking what the retail prices index ( RPI), a measure of inflation, was in March of that year.

Tuition fee loans are paid directly to the university, but students will usually have maintenance loans paid into their own bank accounts to spend as they wish. Although the money is intended for living costs, Myron Jobson, senior personal finance analyst at Interactive Investor, said there is “no rule to say you can’t invest a student loan”.

Taking into account the interest that has to be repaid on the loan – which for year one is 7.6pc, and currently predicted to be 5.1pc in year two and 2.6pc in year three – a student living at home would owe £12,250.42 after three years, according to Interactive Investor.

If, however, they chose to save that money each year into a savings account paying 5pc, as the interest compounded each year, they would have £16,953.70 by the time they finished their studies. If a student chose to pay off this chunk of their loan from their savings pot, they would be left with a profit of £4,703.28.

The majority of university students study outside London and live away from home. Across the course of their degree, they would be able to borrow £14,153.34 in maintenance loans, which would leave them with a bill for £15,408.10 by the time they graduate, including interest. However, investing that money across the three years assuming a 5pc return would see the value grow to £21,323.79. If the investment returned 7pc, the value would reach £22,255.53, which could pay off the maintenance loan in one go, leaving a remainder of £6,847.43.

For students living away from home in London, if they can find other means to fund their living costs, they will see the greatest returns from investing the loan. These students are entitled to borrow £ 19,734.94. An investment averaging returns of 7pc across the three years would grow to £31,032.41 once they graduate, £9,547.91 greater than the cost of the loan.

The next decision is what to do with the savings interest or investment growth left after repaying the maintenance loan. It could be saved or invested. The money could also go towards planning for the future, perhaps invested in a Lifetime Isa to save for a first home, or in a private pension for retirement. Mr Jobson said: “The key is to invest over a long period – at least five years to give your investment more opportunity to ride out short- term market volatility.”