Student Loan: Am I doing the wrong thing?

adamt

I finished University in July this year, and in my 3 years at Uni (2005-2008) I have had a tution fee + maintence loan, totalling £10,000.

All of the maintanence loan has been kept in a high interest ISA account with the intention to generate a monthly interest higher than the loan "inflation interest".

However I have just recieved an annual statement from the Student loans company, and i am currently paying approximately £40 per month interest on the £10k loan.
But my ISA account which has £7000 in is only gaining £25-£30 a month.

This £7000 in the bank was taken as a future house deposit, but am not considering moving out for a good 12-18 months.

So now i am thinking have i made a mistake, should i just pay off the loan with the ISA money, and just have the £3000 tution fee debt?

To make matters worse the loan money i have been saving has been in IceSave, so the last 3 months i have gained ZERO interest, and am still waiting for the 'paper application form' , as the nominated account on my icesave account was closed by Natwest when i emptied the account (Natwest ISA)

Any advice would be appreciated

Sorry for the long post

p.s. i have read Martin's student loans article, just wanted your opinions

Lokolo

Well the rate last year was quite high (4.8%), so thats a problem, but now it has gone down to 3.8%.

Also you have £7k in savings, £10k debt so the extra £3k will be adding interest which you aren't saving with.

5% ISA with £7k is £350 a year.
Thats about how much interest you are earning.

Now £7k of the debt (ignore the £10k, as you don't have £10k at the moment do you) cost you last year, £350 a year (4.8% rounded to 5%) so basically, by paying £7k of the debt off you would have not gained or lost anything.

This year it is 3.8% (rounded to 4% for ease), so interest totally £280 on the £7k debt. So basically you would be £70 less off from not saving the money.

Yes there is the other £3k but that will be earning interest no matter what (if you pay off debt or not).

adamt

Thank you Lokolo for this detailed explanation.

However i should have been more specific with the figures.

Here is the interest statement of the last 3 months from the Loans company:

June 08: £39.62
July 08: £41.09
Aug 08: £41.27


Balance carried forward: £10,409.77


With this higher interest than you first worked out ( my fault for not being specific) is it still more financially beneficial to keep the money in an ISA rather than to pay the £7,000 off?

thanks again

CLAPTON

what done is done
since septmeber 2008 the interest rate on the SLC is now 3.8%
so on 10409 your 41.27 interest will drop to 32.9 per month

i.e. 10409 x 3.8% /12 approximately

so what are you earning on the savings? as long as its more than 3.8% you are making a profit.

Lokolo

CLAPTON wrote: »

what done is done
since septmeber 2008 the interest rate on the SLC is now 3.8%
so on 10409 your 41.27 interest will drop to 32.9 per month

i.e. 10409 x 3.8% /12 approximately

so what are you earning on the savings? as long as its more than 3.8% you are making a profit.

Just a question for you, whilst on student loan rates. was it you that posted the figures about the rate being good one year, bad the next? Can you remember what thread it was?

Also back to the main question:

To earn more interest than paying, if you have £7k and debt is £10k you need a rate that is 1.43x better than the student loan rate. So currently 3.8% means you need a rate of 5.434% at least, then you will be getting profit. You're £7k will earn more interest than the £10k is getting.

CLAPTON

No it wasn't me as I recall but the recent rates have been
2.4% for sept 2006-07
4.8% for sept 2007-08
3.8% from sept 2008

but for the OP's issue the historic rates are just that .... history and now the only isssue is whether it costs more in interest for the SLC 7k than you can can earn in a saving account. The other 3k isn't part of the comparision.

Lokolo

CLAPTON wrote: »

but for the OP's issue the historic rates are just that .... history and now the only isssue is whether it costs more in interest for the SLC 7k than you can can earn in a saving account. The other 3k isn't part of the comparision.

I know what you mean but I think the OP wants to be gaining more interest altogether (the £10k) than what he has got, the £7k, rather than just considering per £ like we do.

adamt

No im not after profit, that would just be a bonus.

I was just seeing if it was worth keeping the £7000 loan if my ISA interest doesnt match/exceed the loan interest.

So if i can find a + 5.434% ISA account to put the £7000 in, i would not be losing money by keeping the loan?

thanks again

kariesmith

If you have the money just pay off all your loan amount as quickly as possible and be tension free

Oldernotwiser

kariesmith wrote: »

If you have the money just pay off all your loan amount as quickly as possible and be tension free

Why should having a student loan make anybody tense?

To the OP, although you may not want to buy a property for at least a year, you might not be able to save the same amount in this time and if you can, you could do so, have a bigger deposit and have a wider choice of properties/mortgage options. Also see another thread on here which talks of the interest rate dropping immediately on student loans. Hang onto the money; it's an option you'll never have again.

CLAPTON

adamt wrote: »

No im not after profit, that would just be a bonus.

I was just seeing if it was worth keeping the £7000 loan if my ISA interest doesnt match/exceed the loan interest.

So if i can find a + 5.434% ISA account to put the £7000 in, i would not be losing money by keeping the loan?

thanks again

if you only have 7000 in saving then you need to compare these two options


a. keep the 10k loan and save the 7K.
as long as the interest rate on the saving is greater than 3.8% then its worth doing

or
b. use the saving to pay off 7k of debt, leaving just 3k of debt costing you 3.8%

whether or not your interest earned on ISA 7k is greater than the interest paid on the slc 10k may be of interest but its irrelevant to a rational decision on whether to pay the loan off.