Student Loans: "Should I pay mine off?" article Discussion Area

Ted_M

What a wonderful phrase.

What is the opposite of "In Real Terms", it maybe something like - "In Make Believe Terms".

"In Real Terms", description - Beginning Balance, say £1000, after a year your new balance is £1032, at inflation rate of 3.2%.

"In Make Believe Terms", description - Beginning Balance, say £1000, after a year your new balance is £1032, at inflation rate of 3.2%.

Lets try a Commercial Loan -

"In Real Terms", description - Beginning Balance, say £1000, after a year your new balance is £1049, at interest rate of 4.9%.

"In Make Believe Terms", description - Beginning Balance, say £1000, after a year your new balance is £1049, at interest rate of 4.9%.

Either way, a year on your debt has increased from its original amount.

marshall2k

The debt has increased in both cases, but the student loan amount will buy you the same amount of whatever is in the shopping basket used to calculate inflation year on year.

AddieH

marshall2k wrote:

The debt has increased in both cases, but the student loan amount will buy you the same amount of whatever is in the shopping basket used to calculate inflation year on year.

marshall2k is correct, it might be going up in terms of the prices we think of on Friday 29th September 2006, but over time the purchasing power of money decreases.

The example I take is a can of coke, back when I was at school you could buy a can of coke for around 30p, where I work now the same can would cost around 60p. The product's not changed, but my 30p now only buys half a can as the "value" or "purchasing power" of my 30p has halved.

The interest rate on student loans is the same the loan increases in terms of pounds and pence, but it's not actually increasing faster than anything else you might buy.

tr3mor

Ted M, let me try to explain...

Say you had a loan of something daft from a company, eg 100 mars bars. You have 20 years enjoyment from these then the company wants their 100 mars bars back.

A Mars Bar in 1986 would be about 20p (at a guess, I was 2), a mars bar today is 40p. So they spent £20 to lend you the mars bars, you have to pay £40 to give them 100 bars back!

This is an increase in real terms, the company has no real profit from this, they gave you 100 mars bars and received 100 mars bars in return.

If the company were looking to make a profit in real terms it would ask you to pay back, say, 150 mars bars. In this case, the company would have made a 50% profit, in real terms, over 20 years. This would cost you £60 today.

What is so hard to grasp about inflation?!

Ted_M

To begin with, I have no problem understanding inflation. Although those explanations where terrific. The point I was trying to make is that “In Real Terms” is a near meaningless phrase, let’s just call it what it is, the rate of inflation, currently 2.4%.

The other points -

1. UK National Student Debt is increasing rapidly, last year by about 20%.

2. The low/middle income bracket of employee’s in the UK will, if incurred an average size loan, have this debt for the rest of their lives.

3. If you have the means to make extra payments to your loan, without incurring extra debt, then I would take that opportunity ever time.

marshall2k

But if the money for extra payments were to be placed in a savings account the amount of interest accrued would be more than that saved in interest on the student loan.

Once I finish study, my plan is to pay off my overdraft the day before it attracts interest and pay the student loan at the minimum rate (9% of anything earned over £15,000). If I have the means to make extra payments that will go to savings or, if applicable, as a mortgage overpayment.

AddieH

marshall2k wrote:

or, if applicable, as a mortgage overpayment.

Again, a much smarter idea always service the debt at the least beneficial terms first of all and I don't think you'll find a "debt" under more beneficial terms than a student loan other than a gift from family!

anewman

Not read thoroughly through the thread. However, I do have my doubts about not paying it off if I am able to.

My loan is about £12k in total and costs about £30 a month in interest. The only way I could get £30 a month from having money would be to have savings of about £8k which is just not possible. If I am never likely to have enough money in savings to gain the same amount of interest the loan costs me, isn't it better to pay it off to help reduce the cost of the interest?

Although if I did have a mortgage or other loans and so on, it would be best to pay off the highest rate lending rather than the student loan - but if I do not have a mortgage and so on, I cannot possibly make up for the cost in interest.

The only possible get out clause would be to get to 65 with barely earning £15k, which seems quite likely as noone wants to give me a job

across

i think it goes away when you reach 50 if youve not earned enough and that will come quicker than you think!:beer: (so i'm told! )!!!

anewman

across wrote:

i think it goes away when you reach 50 if youve not earned enough and that will come quicker than you think!:beer: (so i'm told! )!!!

It's 65 in my case. They changed it recently to after 25 years. So I have 39 years to go

Quote from Martin's article "If you never repay due to consistently earning less than the payments threshold, once you reach 65 (for loans taken before September 2006) or 25 years from the first April of graduation (for loans after September 2006) your debts are wiped clean."

Just worked out. If I consistently earned £20k over 39 years, (which I would be happy with) I would repay £9,750 then have nothing else to pay (leaving a few thousand unpaid).