Student Loan

s0198362

I have put this here, as it may get looked at more than in the student section.

I have recently graduated (2005) but am now doing a post-grad Phd. This gets me a grant (tax free) of £12000 p/a. I have just finished paying off various interest gaining debts (credit card etc.) but am still into the majority of my HSBC overdraft (decreases from £2000 interest free by £500 each year after graduation). At the beginning of this tax year I recieved my student loan statement (which I don't have to pay off due to not earning under PAYE) and it is at approx £15,000 gaining around £30 p/m interest.

Here is the question.

Should I really think seriously about paying some of this off now, e.g £200 p/m even though it is not compulsory, or put money away into a mini cash ISA or Alliance and Leicester 10% account, which I shouldn't have to pay interest on as I am still a student?

Thanks for any advice/tips.

vicki98_2

I'd be tempted to start paying something off my student loan now to begin reducing it .. hopefully then once you have completed your phd you will be earning over the threshold and can continue to pay it back out of your wage every month.
A friend of mine paid her student loan off whilst studying her phd (she only had 1 years worth of loan as her 1st 2 yrs were under the old grant system) .. and she really benefited from doing it this way

grumbler

s0198362 wrote:

...approx £15,000 gaining around £30 p/m interest...

£30*12/£15000=2.4%APR. You can make some profit by putting money into a savings account instead of repaing the loan. If you are not a taxpayer, there is no need to use ISAs. You can use any savings accounts. Just submit R85 form to have interest paid gross.
Yes, regular savings accounts pay highest interest now. Use it (them) in combination with normal easy-access acoount(s).
And don't spend the money!

s0198362

Thanks to both posters.

Grumbler, would I still get enough interest in one of these 10% accounts (e.g. A&L) which only lasts a year, then move it onwards to something better, or would you suggest something different?

grumbler

s0198362 wrote:

...would I still get enough interest in one of these 10% accounts (e.g. A&L) which only lasts a year, then move it onwards to something better, or would you suggest something different?

Any account (registerd to receive interest gross) with AER higher than your loan APR will bring you more interst than you can save by repaying the loan. If you don't have a lump sum ready now, using regular saving account(s) is the best strategy. When the account matures in 12 months move money into an instant access account with a good rate and keep on paying into regular savings account it it is still available. If you have a lump sum saved and don't have enough income to pay maximum allowed amount into the regular savings account, you can 'drip feed' it from an instant access savings account.
See:
Starting Saving guide,
Regular Saver article and discussion

Tirian

WARNING:

Before signing up for one of these high interest savings accounts, read the terms and conditions very carefully. Many of them have multiple and very particular conditions, and if you fall foul of any of them, your attractive 10% interest rate will be switched to their standard account rate, which is usually pathetic

For example, here are the t&c for Barclays' much advertised "Regular Saver" account:

- You are not allowed to deposit more than £250 per month
- Neither are you allowed to deposit less than £25 per month
- You must make exactly 12 deposits in the course of the year - no more, no less
- These must be by standing order
- From a Barclays current account
- The interest rate is valid for only one year, and is only paid at the end of the year
- You may not withdraw any money from the savings account at any time during the year
- Tax will be deducted from your interest, making it 8% net
- You must pay in at least £1000 a month to the current account
- This must include your salary / pension

If you transgress any of these you will be switched straight to their "Easy Saver" account, and your interest for the full year will only be paid at a measly 2.37%

It's being plugged as an amazing saving option, but in reality since you can only drip feed into it, the maximum interest you can earn over a year is £144 (at the full 10% rate, untaxed) - and only if you can save £250 a month, which seems unlikely on your PhD salary. Your student loan, at its current rate of 3.2% accrued on a daily basis will rack up £97.50 interest on £3000 worth of debt. The max amount you would actually gain by saving this way ends up being only approximately the same as what you would gain by paying that amount off your student loan.

And you risk losing out if you happen to transgress any one of their many and stringent conditions.

s0198362

Ok, I have done some calculations on this, but fear I may be well off the mark.

Say I save the max £250 p/m at 10% interest, (no tax deducted - still technically a student).

Do I get 10% interest after 1 year on the first £250 (£25), then for the second £250 (11 months) do I get (25/12) x 11, i.e £22.90 etc etc. i.e get total interest of £162.44?

OR.

do I get 10% interest per month, so

month 1; total savings = £250; interest = £25 10% of 250 * 12/12
month 2; total savings = £500; interest = £45.83 10% of 500 * 11/12
month 3; total savings = £750; interest = £62.5 10% of 700 * 10/12
month 4; total savings = £1000; interest = £75 10% of 1000 * 11/12
month 5; total savings = £1250; interest = £83.33
month 6; total savings = £1500; interest = £87.5
month 7; total savings = £1750; interest = £87.5
month 8; total savings = £2000; interest = £83.33
month 9; total savings = £2250; interest = £75
month 10; total savings = £2500; interest = £62.5
month 11; total savings = £2750; interest = £45.83
month 12; total savings = £3000; interest = £25 10% of 3000 * 1/12

i.e. total interest of 758.33.

I wish it to be the later, but fear it is the former, in which case I may as well pay off my student loan (actually almost £40p/m interest).

If anyone could confirm which one it is, I would be very grateful. The 10% account is the a&l

http://www.alliance-leicester.co.uk/savings/index.asp?page=prem-regular-saver&ct=htmlBquarprsmay06

Thanks

david_hellier

If you are getting the grant in one lump sum then I would suggest you buy premium bonds and cash them in monthly throughout the course. At the start of the investment you will have a 1 in 2 chance of winning.

As far as the loan is concerned, forget about it. You really should not worry; just regard it as a tax. You never know, when you get a job, you can negotiate with your new employer to get it paid off! Remember to budget carefully; money out must be less than money in.

grumbler

s0198362 wrote:

Do I get 10% interest after 1 year on the first £250 (£25), then for the second £250 (11 months) do I get (25/12) x 11, i.e £22.90 etc etc. i.e get total interest of £162.44?

Yes, this is correct. Your 'OR' calculations and £785 result are, unfortunately, wrong (it should have been: £250 one month, £500 one month, ...., £3000 one month).
The simple formula to use is £250*6.5*10%=£162.50

See Regular Saver article and discussion.

Tirian

The interest is calculated daily, from the day that the amount is credited. It is then added to the account at the end of the year, so you would in fact earn a little more than £162.44 - but don't get too excited. Your total earnings would be £178.03 over the year, if you credited £250 on the first of each month.