Pay back student loan, or keep it?

AddieB

I've got an £8,000 student loan, but I have £4,000 of it in a Halifax Websaver account earning just shy of 5%.

My theory is that the interest on the £4k offsets the interest on the £8k as its roughly double the student loan rate.

Would I be better off paying the £4k off the loan, or shall I just stay how I am now? Paying £4k wouldn't change my monthly deductions, just make me pay it off earlier. I had planned once the amount owed is the same as the amount I have in the bank to pay it off in a lump sum?

Any thoughts and opnions gratefully recieved.

Cheers!

morg_monster

As long as your savings account has a higher interest rate than your student loan, you are better off financially just keeping the money in the savings account, and paying your usual monthly repayments as calculated by SLC. This is true no matter how much money is in the savings compared to the loan. (assuming you don't have a psychological desire to just pay it off asap and be done with it)

At the moment the student loan has an interest rate of 3.2%, so you're better off with the money in the savings account. But - when did you graduate? Some earlier student loans have a higher rate of interest I believe. If you graduated in the last 5 years you should be OK.

As you'll see from this thread below, people have differing viewpoints on this particular type of debt:
http://forums.moneysavingexpert.com/showthread.html?t=215710

I personally view it as the cheapest way of borrowing money, so I'd rather just pay the minimum and save the rest, so that I don't have to borrow as much money if I want to get a mortgage or need a car loan - both of which will be charged higher interest than 3.2%.

I'm sure people with the other POV will be along as well!

Midas

If you have the self-discipline to not spend your savings, you are right that you are (marginally) better off with things as they are. You also have a fund that you could access easily in an emergency.

If you lack self-discipline and risk being tempted to spend the money, use it to pay off part of your loan instead.

morg_monster

One other answer to a specific point - If you want to pay it off ASAP, it will be quickest to do as you plan: keep the £4000 in the savings, add to it over time, and then when it is equal to your remaining loan amount, get a statement from SLC and pay it all off in one go.

This way you technically lose some interest which you would get if you let the loan run its whole course at 3.2%, with the £8000 in the bank earning 5% interest, but it would be the quickest way to pay it off.

Finally - why not get one of the regular savers accounts which pays 8 or 10%, as well as your 4% account? You could 'drip feed' the maximum amount into it every month (usually £250) from your 4% account. If you got the maximum of £3000 into an 8% account in a year you would earn £120 on it, plus £100 on the money left in the 4% account. A total of £220 compared to £160 for leaving it in the 4% account all year.

That'll get it paid off as soon as possible!

Astaroth

If your AER (after considering the tax implications) means the income from the savings is greater than the loans interest costs then the financially sound thing to do is simply keep the money in savings and pocket the difference. This of cause assumes that all your payments to the SLC goes out on time/ doesnt bounce etc if you have the older non-PAYE style of loan.

I am in the same possition though my loan is now lower than yours and the money in ISAs so no greedy tax man taking it but I do still have some itch to pay it off as the £120 a month going out of my bank account is "real" but the interest earned on the ISAs which just gets paid back into them isnt real to me as it isnt spendable (of cause it would be if I transfered it but the amount is so little on a monthly basis it may as well be left to compound the insterest)

AddieB

I do have a desire to pay it off as to me it is a psychological debt, more so then my credit card balance which is £1000 but is 0%.

I already have a regular saver with Halifax, my current bank, transfering £250/mth into it which is the max which works out at 7% interest on £1500 which is £105.

I only graduated this year (well, today actually) so just planning for the future, I would like to class myself as being debt free at some point before getting a morgage!

morg_monster

Well done on your graduation!!

Good for you for planning for the future. The saving sounds really good, its very handy to get into that habit as soon as possible. I think one key thing to remember when deciding how to pay off your loan is that once the money has gone to pay off the loan, it is gone forever. If it is just sitting in a savings account accumulating interest, then you have a choice at the end of the day - you could pay off the loan, as planned, or if something unexpected comes up in the meantime, you have a nice load of cash which can be be used as a 'cushion' if necessary.

Also it will save you more money in the long run to be able to say to your mortgage provider (for example) "I have £18000 for my deposit but I have £5000 outstanding student loan" than if you say "I have no student loan debt, but only a £10000 deposit" (especially as your loan size is not huge compared to some).

Just something to think about.