My student loan, pay the minimum confusion

grastgirl

I know this is dealt with in one of Martin's articles, but I honestly can say that despite being an intelligent individual (at least I hope so) I don't get why you wouldn't pay back the loan as soon as possible.

Say the loan was originally £13K, then due to additional studying the interest brought it up to £15K before you could even start thinking about paying it back. Then on a salary of say £20K, the payment is £450 a year and the interest is £450 a year (3% interest), so in effect you're not getting anywhere on reducing the actuall debt. If it continued at the same rate you'd have paid something like £18K to the government between starting paying it back and retirement (assuming paying back from 25 yo to 65 yo) without actually paying off the debt (until it gets wiped off by the government anyway). Obviously if you did manage to pay it off in that time you'd have paid off the interest plus the original loan, which comes to anywhere between £15 and £33K!

I can see that the inflation rate interest should mean that the money owed should be worth the same each year, but:
1. There is no reason why the month they pick to determine the inflation rate hasn't got higher inflation than that for the rest of the year, presumably invalidating the "it's always worth the same anyway" argument?
2. They have been talking about personal inflation rates as well lately and although I have no idea what mine would be, surely if you're wages aren't going up as quickly as inflation you start to lose out because the debt is effectively increasing?
3. Doesn't compounding the interest make a difference, especially if you're paying off less than the interest each year?

I would have thought the general terms of this as debt is a very strange introduction to borrowing money, as it goes against a lot of sensible rules about borrowing ie.
1. Don't borrow for everyday things
2. Always pay off more than the interest so you're denting the capital
3. Start paying it off asap (they don't even consider you paying it off until you're earning enough salary at the right time of year).

In conclusion, I'm not sure why Martin is against paying it back and getting rid of it, when it's such a poor introduction to borrowing and people can be saddled with it for their whole working life, which can be especially bad if they lose track of you at any point and start bringing in the debt collection agencies.

grastgirl

P.S. Sorry for the long post
P.P.S. I'm a newbie member, so please be gentle with me.

tr3mor

The point is you'll always earn extra putting £100 in a savings account than you'll save by paying an extra £100 off the student loan!

Idiophreak

grastgirl wrote:

Then on a salary of say £20K, the payment is £450 a year and the interest is £450 a year (3% interest), so in effect you're not getting anywhere on reducing the actuall debt.

That's not strictly true.

The idea is that as the loan is linked to inflation, the 15k you have the first year is actually more than the 15k you have the second year.

ie, in the first year, if you were to buy £15k worth of bread, you'd have more bread than if you did it the next year.

So although you won't have reduced the loan in numbers, you'll have reduced it in value. Is the idea.

lengthy edit: and the compound interest thing is fine. Inflation "is" compound if you like.
If inflation is 3%, 100 in year 1 = 103 in year 2 = 106.90 etc

For what it's worth, I share your concerns - it's taken me *ages* to convince myself that it's not costing me more not paying it off asap, but that genuinely does seem to be the case.

In fact, in real terms, inflation is widely considered to be much higher than official figures at the moment - with fuel costs, railways, house prices, utilities etc etc all way ahead (in fact, most of the stuff people spend money on). So that being the case, your debt could be seen to be reducing the longer you leave it - although, of course, if you're not earning any more, that isn't much to cheer you up

grastgirl

Thanks for the replies. I do understand the logical reasoning behind it all and at least knowing that real inflation is probably higher than the government's rate does make it easier to take, but I guess emotionally it seems to go against the grain (especially when you read the boards here and see how much grief people get into because of debt).

I guess the main problems I have with it are these:
1. You can pay the minimum required and the numbers still go up
2. You can pay the minimum and the numbers go down, but could take the rest of your working life, possibly paying off more than the original debt in interest, but without getting anywhere on the capital
3. It feels like paying excessive amounts of money to the government, most of whom got it all for free (which really narks me)

I don't know if there's been an answer to this next question or not... Is there a most cost efficient way to pay it off, if you feel you have to? My mother does worry about it on my behalf, which is probably why I'm more inclined to pay it off than just keep it going.

(I must have been convinced of the arguments when I first took out the loan, but then I think being skint in my final year made me change my mind and want to get rid asap).

Grastgirl

Jersy

i had this discussion with my gf, and th ought how i wanted to pay it off ASAP

but on thinking about it ive changed my mind

with house prices rising, it would be more benecifical to get on the housing ladder

tr3mor

grastgirl wrote:

1. You can pay the minimum required and the numbers still go up
2. You can pay the minimum and the numbers go down, but could take the rest of your working life, possibly paying off more than the original debt in interest, but without getting anywhere on the capital
3. It feels like paying excessive amounts of money to the government, most of whom got it all for free (which really narks me)

You really have to convince yourself the numbers aren't going up. The idea is you're paying the government back exactly what they lent you.

1. In real terms the numbers are going down. If £10000 would buy you 10000 loaves of bread now. Over a period of time the price of bread might double, as would your loan if you weren't paying interest, but you are, so your loan is going down. Say you now owe £15000 or 7500 loaves, the monetary value has increased but the real value has decreased.

2. Again, let's take a £10000 loan. Assume you have 40 years of your working life before it is written off. Now take a look 40 years ago, £10000 would have bought you five Jaguar E-types (the car to have in the 60s), today the same £10000 pounds would buy you a modest hatchback. Will this £10000 still feel like a noose around your neck when it won't even buy you a push bike?

3. Another £10000 - If the government weren't giving it to you they could pay a nurses salary for six months. Say salaries doubled, now a nurse would cost £20000 for six months. The government want back their true cost of what they gave you.

grastgirl

I am trying not to be dense about this, my rational/logical mind does understand that the value of the debt stays the same (assuming the interest tracks inflation), but I can't seem to get over the particular problem that it is still a debt and emotionally I'd rather be rid of it, and therefore completely debt free. I think it's the emotional side which I have the problem with, not the logical one. Presumably, although mortgage companies don't take it into account like normal debt, it must be included in any "affordability" offer they might make you?

tr3mor: The numbers themselves go up should you be in the unfortunate position of paying off less than the interest they're charging you, although as you say in real terms the value goes down.

Any ideas about what the most cost efficient way of getting rid of it is? Monthly payments of the most you can afford straight to the loan,
Monthly payments into a savings account for a lump sum pay off asap,
Something else?

Grastgirl

cupid_s

Never get rid of it! Or don't make overpayments for that purpose anyway. You'll never be better off. Anything you would overpay towards it put into a savings account and then pay all that you have saved towards a house deposit or pay some off your mortgage (which will probably be charging 5-6% interest instead of 3)
You may one day decide to go into teaching where they pay off something towards it each year anyway. Or you might (lets hope not) be prevented from working for the rest of your life and you'd never have to pay it off. Or you might decide to become akept woman/man and still not have to pay it off.

Surely we all have better things to spend the money on

kelloggs36

cupid_stunt wrote:

You may one day decide to go into teaching where they pay off something towards it each year anyway.

Is this true of all teaching courses? I am in year 2 of a Primary Education degree (not PGCE) and have not heard this?

emzig123

kelloggs36 wrote:

Is this true of all teaching courses? I am in year 2 of a Primary Education degree (not PGCE) and have not heard this?

Hiya Kellogs36, this used to be the case but they scrapped the scheme a few years back. It was only for shortage subjects ie Secondary Maths/Science as well I think. Sorry!

kelloggs36

Oh poo!!!!