Repaying Student loan against investing

PACH

My son started to work about six months ago after finishing university and leaving with a hefty student loan of over £8000.
Would it be better for him to start repaying with lump sums, besides having 9% taken out from his earnings above £15000, OR investing his money in Mini Cash ISAS, etc.? Any good sugestions?

Walletwatch

What rate of interest is he paying on his student loan? I personally think one should make the most of low interest student loans and not hurry paying them off. You will in all probability, find that a mini-ISA will give him a higher rate of interest taxfree, than what he's paying on the loan.

PACH

Thanks for your reply. It definetly looks better to put it into a Cash ISA as the present interest rate on the student loan is 2.6%.

lipidicman

Best to use the ISA route, rather than lose the allowance

However dont be tempted to withdraw and spend!

BTW the loan rate seems rather high - did the loan get transferred? They used to be 'inflation only' I believe

Debt_Free_Chick

From a pure mathematical point of view, the ISA first and let the loan run its course is probably the best route. As others have said, he is likely to earn more in interest on his ISA than he is paying on his loan. So once the loan is paid off, he'll be in a better overall position.

However, you may wish to consider how this might affect his attitude to debt, in the long term. There are many former students on endless Debt Boards who have gone on to run up more and more debt, often because they did not view the student loan as "real debt".

only you can evaluate your own son's attitude, but - leaving aside the financial side - there could be something to be gained by teaching him that debt should be paid off as soon as possible. And generally to be avoided (with the exception, probably, of a mortgage).

HTH

MJSW

lipidicman wrote:

BTW the loan rate seems rather high - did the loan get transferred? They used to be 'inflation only' I believe

They still are inflation only, and that being the case 2.6% seems rather low! The current rate of RPI inflation is actually 3.5%! However the rate is fixed for a year at a time, and will change again from 1 October 2005, based on inflation in March 2005. It is looking likely that the next rate will be around 1% higher than the current rate. Should still be able to comfortably earn more than this in an ISA though.

lipidicman

Ah, I guess I was getting confused (as the government wants us to) and using a different measure of inflation! I thought it was lower! I should do my research before replying!

MJSW

The latest inflation rates have been published today. RPI inflation in January was 3.2% (down from 3.5%). The CPI measure was unchanged at 1.6%, and the underlying RPI measure fell to 2.1% from 2.5%.

king_mongo2k

The student loan is one of the best rate loans you can get.

I have my whole 'loan' sitting nicely in my cash isa account with the Halifax earning 5.15% intrest.

the loan intrest is ~2.6% so go figure

Im not gonna pay that baby off till i really have to. :rolleyes:

So should your son
a. pay it back
b. take advantage of it and invest?

hummm?

discuss::

PACH

Thank you all for taking the time to reply. Much appreciated. It will definitely be an Isa to start of with and slowly he will be repaying his loan through taxation. I realy love this site . Congrats goes to Martin for starting it and all of you out there with your great contributions!

ashcarrot

What i did was i filled up my cash-isa then paid off the loan and took advantage of the cash-back by paying it via a credit card (apparantly it came up as a purchase rather than cash-advance so i got an instant 0.5% reduction effectively).

I'm now debt free well apart from my stoozed credit cards