Is Martin wrong!!?? - Student Loans

theresagreen_3

I feel awful for even suggesting it!

Having read Martins Tip regarding Student Loans I sat down and worked out my finances last night. I worked out that I am paying approx £300 a year in interest on my student loan. Although it makes sense to concentrate on savings as they pay out a higher percentage, I dont have equivilant savings to that of my student loan. So although I can put money into a high rate savings account, id still be paying more a year in interest on the loan than I could earn in interest unless I had a win fall of £12 000.

Does it make more sense to concentrate on the loan until the time that its low enough that my savings will out pay the interest on my loan? Or have I got it all backwards

Hope that makes sense....

Astaroth

I have to say it isnt awful to suggest it at all as my personal opinion does differ from Martin on several points.

Your choice is to either pay the interest on what ever over payments you could afford and gain interest by having this in savings or simply reduce the payment of interest on the loan. As long as you have a higher interest rate on savings (net after tax) then you are better off saving than paying off the loan - assuming that you do actually keep the savings and dont dip into them.

For me the amount of money actually saved though is going to be relatively small and this has to be weighed against ongoing monthly payments/ self disipline on not spending savings and so is a personal judgement call as to what is best for you - though certainly mathmatically Martin is correct on this one.

mdb99jh

hi theresagreen, welcome to the boards!
In actual fact I think martin is spot on. What he is saying is that even if you have just £50, it is better to put it in a savings account where it will earn 5% interest over the course of the year (=£52.50) than to pay off the student loan by £50 as this is only at ~2.5% interest (debt will be £51.25 at end of year). In this example, you are £1.25 better off at the end of the year by saving rather than paying off the loan. Obviously this amount becomes more significant the greater the sums of money involved, but it is worth saying that despite this, I paid off all my student loan as soon as I could for the sake of peace of mind.

HTH

mdb99jh

MSE_Martin

Just a quick response on the two posts above. Of course people are free to disagree with me - though i think there may be a slightl misunderstanding here

theresagreen

You say "I'm paying £300 in interest on my student loan, I could never make that much interest on savings". Well actually you could - if you had £12,000 in savings it'd pay you more than the £12,000 cost you.

The confusion is you're not comparing like with like.

If you look at it like this - then it may make more sense

If you have £100, the actual choice is between

a. Reducing the debt you have from £12,000 to £11,900
or
b. Having £100 in a high interest account.

By selecting option b. you will earn MORE interest on the money, than you would REDUCE the interest on the loan in option a. Therefore option b. is the best choice for you. It means your £100 is being more productive.

I hope this helps.

Astaroth

Actually I dont think we're in disagreement. You write

For me the amount of money actually saved though is going to be relatively small and this has to be weighed against ongoing monthly payments/ self disipline on not spending savings and so is a personal judgement call as to what is best for you - though certainly mathmatically Martin is correct on this one.

And in the article I say (in the bit about savers)

Yet while there’s a gain it isn’t huge, and while as a MoneySaving purist I feel obliged to encourage you to profit; actually for peace of mind, some may feel comfortable with becoming debt-free and I wouldn’t argue it too fiercely.

Martin

anniecave

the one above just got there before me....

You have to distinguish between what you have borrowed (which is essentially a debt) and what money you have that you could pay back (whether you do or don't). In addition you may have to pay back some value under the terms of the loan, which is taken out of the money in the second category.
You could have borrowed £20,000 and be paying lots of interest and only have £100 to pay back as an extreme example, so only get £3 odd interest on the savings.
Alternatively if you have only £5000 loan and £3000 of savings then if you work out what you are being charged interest and what you earn in savings it's similar (approx £120) even though you've saved less than the loan value.

I just think of student loan of going up with inflation. So as long as the rate of interest you're getting on your savings (after tax) is more than inflation, then you'd be making money by keeping the money in a savings account.

Astaroth

MSE_Martin wrote:

Astaroth

Actually I dont think we're in disagreement. You write
And in the article I say (in the bit about savers)

Martin

Sorry, if I was unclear, on this occasion I was saying that I did agree with the theory that you are financially better off and simply commenting that there are the other considerations.... it is other articals where our opinions diverge from each other.