student loan ~~~~

climbgirl

siuron wrote:

morg: now is making more sense...but i still cant get my head around the £40 interest charge a month at the moment (£480 a yr), how do i compensate that??

there's no way i can compensate the £40 a month charge until i have a big enough sum with good enough interest to level the interest being charge? so am i right in saying that i will not save as much as being charged for the first 2 yrs?(thats if i save £7500 a yr)

there's not a lot you can do about that, because you haven't got the lump sum, either to pay off hte loan or to save in a higher interest account.

what morg has shown is that if you were planning on either paying or saving £200 a month, you'll get more money out of saving it. if you put that £200 on your loan, it's going to decrease your interest charge a little bit from £40 a month. but you'd get slightly more than that interest decrease by having it in the bank.

unless you've got £15000 to repay the loan (or offset it in a savings account), you're going to get interest on it.

putting it in savings to get the slightly higher rate, only works if you're earmarking all that money (savings and interest earned) for the loan. If you use it for something else, (house, car, whatever), you'll be accuring more interest on your loan and it'll cost you more in the long-run (I think this is right, correct me morg if I'm wrong. that's kind of why I'm advocating repaying it or putting hte money into a high savings account with the aim of repaying it when you've got enough to clear it)

morg_monster

siuron - first, just think of the interest as a percentage rather than a fixed charge. Your total amount is adding interest of 3.2% each year, that is 0.26% a month. In a savings account with 4%, this is 0.37% a month. Regardless of the pound amount of interest they add on every month, the percentage is the same. Obviously if you pay off more than the interest every month, you are making headway into the capital, and will pay it off faster, but still, put this payment in a savings account and it will make MORE interest for you than you would have been charged for it, had you put it in the loan.

Because the interest rate is higher in the savings than in the loan, any amount of money in the savings account for any length of time will earn enough interest to cover (a) that amount of money in the loan AS WELL AS (b) the interest that you that amount of money 'attracted' in your loan.

Try and get away from thinking about the interest versus the capital, and just consider the whole caboodle as your loan.

I still think I'm not explaining it too well. It is tricky to put into words!

As an aside I have just worked out, for someone earning £25000, they would pay £75 a month. Ignoring pay rises and changes in interest rates and inflation, if they had a £12000 loan, with 3.2% interest, this would take 209 months to pay off, and in total over this time they would have paid £15600. If that person already had a lump sum of £12000 cash, and put it in a bank account at 4.5%, then at the end of that 209 months, that would be worth £25641. They have a profit of £10,135!!! Bonus!! This is still valid over any time during paying off the loan - the savings account will always have more money in it, than their loan is worth at the time (IE initial amount borrowed, plus interest, minus payments made). So at any time they could use the savings to pay off the loan in its entirety and still have a nice wodge of cash left over (of course the longer they leave it the bigger the wodge!)

siuron

i see. now its all cleared
so its just keep saving anywhere that the interest is higher than the student loan!

morg_monster

climbgirl you are right.

Monetarily, all things staying as they are, you will only gain if you do use the savings to pay off the loan as planned.

BUT the other side is, say - in 5 years time when you need to buy a car for £5000, it would work out cheaper to use your savings to buy a car outright, rather than being charged say 7% interest on a car loan, and still you are only charged 3.2% on the initial student loan.

Of course whether you'd rather do that is down to your own personal mindset. But it is just worth remembering that the student loan is the cheapest way to borrow money.

morg_monster

siuron wrote:

i see. now its all cleared
so its just keep saving anywhere that the interest is higher than the student loan!

yep thats right!! we did it!! :j

siuron

morg just another question..
would it be even better if i can pay the interest plus additional to cut in the capital, AND save at the same time?

or better to use all of it to save?

climbgirl

morg_monster wrote:

climbgirl you are right.

Monetarily, all things staying as they are, you will only gain if you do use the savings to pay off the loan as planned.

BUT the other side is, say - in 5 years time when you need to buy a car for £5000, it would work out cheaper to use your savings to buy a car outright, rather than being charged say 7% interest on a car loan, and still you are only charged 3.2% on the initial student loan.

Of course whether you'd rather do that is down to your own personal mindset. But it is just worth remembering that the student loan is the cheapest way to borrow money.

Yeah, you're right about it offering you financial flexibility in the future to buy houses, cars etc. You just never know what life is going to throw at you...best laid plans and all that. I'm reading somebody's else thread about car finance and that seems to be best avoided at all costs

ceejam

As long as the interest rate you are getting on savings is higher, you're better saving!

Just like with any debt repayment, you're better paying off the highest APR first!

morg_monster

No, in money terms, it is better to use it all to save, as long as the savings interest rate is higher than loan interest rate.

like i said, technically the longer you have the money in savings, the more money you are 'saving' on that 'extra' interest, but, if it makes you feel better to pay off a lump every year then do that. You won't lose that much of the 'extra' interest and it sounds like it would make you feel pretty good. But just keep an eye on what you can afford to save and what the future might hold - once you use the money to pay off the loan you can never get it back!

siuron

thx morg. i understand a lot now.
i have a question about ISA savings that i'm not too sure, i've openned a post there
if u kno, please come and answer my queries

http://forums.moneysavingexpert.com/showthread.html?t=178370
many thanks.