Should I Pay Off My Student Loan? 2008/09 article discussion

Sara7

I am currently training to be a teacher and earning more than £15000. Every month the SLC automatically take out £20 to repay my loan. However, my SL is £16,000 wiht £64 interest accumulating every month. Therefore, my repayments don't cover the interest, so my debt continues to increase.

I understand that I shouldn't repay more than I have to on a loan so good, but my automatic repayments don't even cover the interest!

Is it worth voluntarily paying off more to at least cover the interest. Or not bother because at 65 it's cleared?

I would be very grateful for some advice. Thank you.

The_One_Who

Sara7 wrote: »

I am currently training to be a teacher and earning more than £15000. Every month the SLC automatically take out £20 to repay my loan. However, my SL is £16,000 wiht £64 interest accumulating every month. Therefore, my repayments don't cover the interest, so my debt continues to increase.

I understand that I shouldn't repay more than I have to on a loan so good, but my automatic repayments don't even cover the interest!

Is it worth voluntarily paying off more to at least cover the interest. Or not bother because at 65 it's cleared?

I would be very grateful for some advice. Thank you.

You won't be training to be a teacher forever so in a few years you'll start paying off more each month that should cover the interest. I wouldn't pay off anymore than you have to as that extra money could come in handy.

Sammie_UK1

Should I continue paying £300 a month?

I took my first student loan out in 1999 (I had a 2 year gap and earned below the threshold) and graduated in 2006 with a total student debt of £22K. I think it was in 2003 when I was being charged £35-40 a month on interest on the loan amount I had taken out so far and by the time I graduated in 2006, the interest on my loan was £80 a month, all resulting in a total debt of £22k. PAYE deductions were made in April of 2007 and are continuing now. But the PAYE payments barely hurt the interest of £80 a month that was being charged so I felt I had to pay more to bring the interest down and the overall debt down too. I’ve been paying an extra £200-£300 a month for the last 12 or so months (along with the £52 a month that gets deducted via PAYE)

Now…

My Husband and I are looking to buy our first property very soon and we are saving for the deposit. The £300 odd pound a month I pay towards my loan would help us to get that deposit together quicker. But if I don’t pay this amount to my loan, the interest that gets applied monthly, (roughly £50 at the mo I think), will bring my outstanding debt back up and it will keep going up and up.. with higher interests each month.

What would you do in this situation? What’s the best option?..

Would you just pay the minimum PAYE deductions for the loan or would you continue paying the £300 and find the moey for the deposit elsewhere…?



Thanks

Numenor

I would pay the minimum for the time being, and stick the £300 in a savings account. It's generally better to have savings to either make large planned purchases with (e.g. a house deposit, once prices have stabilised) or to fall back on in unforeseen hard times.

Just remember that any money you pay to the SLC, you are never going to get back no matter how desperately you need it.

Also, in the coming months you are going to find that the interest rate on your student loan falls yet further due to the repeated drops in the base rate. So this will be even less of a concern for you in the short term.

Oldernotwiser

Sammie_UK1 wrote: »

Should I continue paying £300 a month?

I took my first student loan out in 1999 (I had a 2 year gap and earned below the threshold) and graduated in 2006 with a total student debt of £22K. I think it was in 2003 when I was being charged £35-40 a month on interest on the loan amount I had taken out so far and by the time I graduated in 2006, the interest on my loan was £80 a month, all resulting in a total debt of £22k. PAYE deductions were made in April of 2007 and are continuing now. But the PAYE payments barely hurt the interest of £80 a month that was being charged so I felt I had to pay more to bring the interest down and the overall debt down too. I’ve been paying an extra £200-£300 a month for the last 12 or so months (along with the £52 a month that gets deducted via PAYE)

Now…

My Husband and I are looking to buy our first property very soon and we are saving for the deposit. The £300 odd pound a month I pay towards my loan would help us to get that deposit together quicker. But if I don’t pay this amount to my loan, the interest that gets applied monthly, (roughly £50 at the mo I think), will bring my outstanding debt back up and it will keep going up and up.. with higher interests each month.

What would you do in this situation? What’s the best option?..

Would you just pay the minimum PAYE deductions for the loan or would you continue paying the £300 and find the moey for the deposit elsewhere…?



Thanks

Personally I wouldn't have been paying off the extra money at all, then I'd've had £2/3,000 extra in savings already and be nearer to having my deposit.

Does it really matter whether the debt goes on and on? Most people don't think so. You're narrowing your options so much by trying to pay this off earlier than you need to.What about if you want to give up work or work part time in the future, perhaps when starting a family? Are you going to put this off because you have a student loan accruing interest?

Borrowing money to fund a degree was intended to help people, not for them to feel shackled by it.

Chris2685

It's quite simple really... The student loan rate will almost always be lower than the rate you pay on your eventual mortgage. So don't pay off the student loan rate, and save up more so you can get a smaller mortgage

bananafaffer

Northern_girl wrote: »

You would be better off putting any money you have to make over payments into a high interest savings account. This is because the interest on the savings account, say 6.5%, would give you a better return that the cost of the interest on your student loan at 4.8%.

For example:

1. For a £10K student loan I would need to make repayments of £105 per month to pay if off in 10 years. At 4.8% interest I would be paying back £2610.80 interest on top of the original amount so in total I'd be repaying £12610.80.

2 If I instead put that £105 in an ISA at 6.25% (HSBC online ISA rate) then after 10 years I would have £17,422.80.

There would be extra interest to pay on the student loan because the interest monthly interest would be higher than in example 1. I'm not quite sure how to work that out accurately but think it would be about £2500 extra.

That would still leave you with about £2500 extra if you after 10 years if you put the money in a savings account. Plus the benefit of being able to draw on that money at any time if there was an emergency.

Of course, you could just continue to build up your savings rather than paying off the student loan early. It would probably come in handy as a deposit on a house say and save you even more money!

This is turning into a really long post but this is the order I will be paying back debts:
- loan with bank
- mortgage
- building up savings
- finally pay off student debts only when I have really really good savings.

Hello!

Right I am confused about this....

I see what you are saying about the interest in an ISA being higher than that being paid on a student loan...however, I'm still a bit confused:

Say my SL is 8K. I took it out starting in 1998, which means that I've been paying interest on some of it for as long as 10 years. Anyway, whilst I see that the interest rate in a savings account is higher than the interest rate being charged on my SL, doesnt that fact that the balance on my SL is loads higher than if I were to start putting money in a savings account mean overall that I'll end up paying more in interest on the loan that I would gain from putting spare money in a savings account?

For example, right now I'm being charged 4.8% or whatever it is on, say, 8K. This means the annual amount in interest will be about £384. If, say, I had an extra £1000 per year which I could put into a savings account at 6.25%, then in a year it would make interest of £62.50. Surely I would therefore be better off using the money to make extra payments of my SL and therefore reduce a) the loan and b) the amount of interest I am paying?

Oldernotwiser

bananafaffer wrote: »

For example, right now I'm being charged 4.8% or whatever it is on, say, 8K. This means the annual amount in interest will be about £384. If, say, I had an extra £1000 per year which I could put into a savings account at 6.25%, then in a year it would make interest of £62.50. Surely I would therefore be better off using the money to make extra payments of my SL and therefore reduce a) the loan and b) the amount of interest I am paying?

I think you're talking about compound interest. If so, this will apply to both to interest being added onto your savings as well as onto your student loan.

Sorry if I've misunderstood your question.

bananafaffer

Oldernotwiser wrote: »

I think you're talking about compound interest. If so, this will apply to both to interest being added onto your savings as well as onto your student loan.

Sorry if I've misunderstood your question.

Yeah I'm not entirely sure what I mean either and probably haven't worded it too articulately....

Basically - I understand that the interest rate on a SL is lower than that on a savings account. Fine.

However, surely if you owe substantial amounts on a SL then even though the interest rate is low, you would be better off paying off the SL than saving the money? As per my example above - an 8K SL will accrue £384 a year in interest (obviously slightly less than this in fact as payments will be being made via PAYE). If i have 8K in a savings account at 6.5% then in a year it will gain £520 in interest in a year, ie higher than that charged on the SL. However, if you can't afford to put 8K in savings per year, and can only do say 1K, then the benefit you will gain from the interest on that 1K will be cancelled out and outweighed by the interest charged on the loan. No?

Chris2685

Nah, if you need the money you need the money. Repaying it won't make a bit of difference. You say (hypothetically) you can't afford to save the 8k. So where you gonna get the money from to repay the 8k loan? It makes more sense to have the cheap loan whether or not you have savings. If you are in a position where you are going to repay the loan, you do have money to save and you are better off using that money to invest in something which pays more than the loan rate.