Seeking advice on strategy for getting debts paid off

danothy

I've got two outstanding debts, one overdraft in the order of £1,100 in the red and a student loan balance of just under £19,000. The overdraft is interest free, and should remain so for the next two years and the student loan was started in 2004 and carries whatever interest rate it carries (I think currently it's 0% and set to go to 1.5%), and neither of them require a minimum repayment.

Other than that my income is approximately equal to my expenditure and I pay my credit card off each month (I just run my spending through it to collect clubcard points).

I'm hoping to trim a bit of fat out of my day to day outgoings so I can start saving / paying off the debts, but I'm not really sure where to start. I'm aware that you should pay off highest interest debts first, that it's a good idea to pay off debts with savings if you can, and understand the concept of net present value (another reason for running my spending through the credit card), but seeing as they're both currently interest free and due to the nature of student loans I'm having trouble identifying the priority out of the two and weighing it against the security of having emergency savings.

Any insight or advice on the best course of action would be muchly appreciated.

Tixy

Hi

Are you paying anything towards the student loan yet?
Is the overdraft still the main current account you are using?

Are you expecting to have to make any large purchases anytime soon or hoping to get a mortgage?

Do you have any savings currently?

If you want to make any large puchases or buy a house then it would seem to make sense to start saving rather than overpaying towards these debts. This is because any new borrowing (including a mortgage) would be far more expensive than these.

You do need to make sure you can clear the student overdraft within 2 years so you could either keep saving until that point and then repay in one lump sum (most cost effective way in terms of interest you would earn) or you could start repaying it sooner (or by a monthy DD).

If you want suggestions for making cutbacks to your current expenditure etc then posting up a statement of affairs is useful so people can add in some suggestions http://www.makesenseofcards.com/soacalc.html

danothy

Some good questions there

Tixy wrote: »

Are you paying anything towards the student loan yet?

No, and I don't expect to be for at least the next two and a half years

Tixy wrote: »

Is the overdraft still the main current account you are using?

No, I've just been paying it off in small lumps at irregular intervals, when I extended the interest free period over the next two years they seemed happy with this arrangement continuing.

Tixy wrote: »

Are you expecting to have to make any large purchases anytime soon or hoping to get a mortgage?

I don't think I will be, but you can never rule out a mortgage or an engagement ring etc. I'm not expecting to be in that situation in the next couple of years though, partly due to the time it would take to save up for them.

Tixy wrote: »

Do you have any savings currently?

None to speak of (it's in the low hundreds) and it's generally earmarked for airfare required to do my research (which I can claim back after the trips).

Tixy wrote: »

If you want suggestions for making cutbacks to your current expenditure etc then posting up a statement of affairs is useful so people can add in some suggestions

I've deliberately avoided an SOA at this stage as most of it would be estimates, but I drew up a spreadsheet last night to record everything I spend and how I spend it. I'll come back with it in a month for it to be picked apart (seems to be a hobby of a lot of people here).

I think I'm best off paying the overdraft back in bits and sacrifice the interest benefits of the savings for the protection against the temptation to spend them etc.

From your questions I'm assuming the overdraft is the highest priority because of the potential jump to a high interest rate in two years, but I'm still worried about what that 9% tax on everything over £15,000 is gonna feel like when it hits, and I'm half expecting it to be fairly permanent over my working life.

Tixy

I know what you mean about the student loan suddenly being taken back. But I think most people simply get used to what they earn and live to that means. So say you get a payrise from £14.5k to £16.5k, you won't actually miss the money going in student loan repayments because you were never actually used to receiving that amount of money. Does that make sense? thats how I see it anyway. I only ever increase my pension contribution % when I get a payrise so I never actually have to take a hit it my net pay figure.

danothy

Definitely being taken out at source is the best way, and it's not so much the hit that I'm worried about, more the reduction of earnings over my working life being more detrimental than the increase in earnings from the qualification, especially seeing as there is talk that graduates don't catch up to no-graduates due to the delay in starting work (exaggerated heavily in my case).

Kt8

i dont even think about my studen loan, comes out of my wages and thats fine with me

tbourner

I'm sure you understand you'll either need to spend less or earn more to start paying off anything decent from the debts now.

The SOA when you do it (I understand, I did one a year ago and got ripped apart, I've done one recently with accurate figures from a years spending on - much better!!) will give you suggestions on how to save some spending.

You could look on the 'Up your Income' forum for some spare time money making ideas?

danothy

Oh yeah, I'm sure I can make some savings right off the bat with a bit of discipline when it comes to food shopping and the like, and I'm not worried about getting a SOA picked apart, that's the whole point as far as I'm concerned.

I have had a look through the up your income thing, and I already do things like valuedopinions and try to fund all my amazon purchases though that and do a bit of contract web design for my research centre to bring in some money.

As for just not thinking about my student loan, it's a hell of a burden to carry for years and years. Obviously the arrangements for paying it back are good, and if you get into trouble financially your liability for it backs off, but it's gotta be worth tackling if you can just to improve earning prospects?

misscousinitt

Hi

My student loan was TINY in comparison to yours as I took it our when student loans first came out. But when I started earning, I was determined to start paying it back. I earned £4k below the threshold for paying back at the time, but I started paying anyway.

It was really satisfying to pay it off... Situations are different now with student debt being much higher and the related % that you must pay back. My suggestion would be to start putting something away now (however small) to help with repayments later and get it cleared and off your conscience asap.

Good luck.