My student loan, pay the minimum confusion

tr3mor

grastgirl wrote:

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

If you're thinking about getting a mortgage at any point then put your extra money into savings, don't waste it giving more money to the government than you have to!

beefturnmail

Looo at it like this - say you won/inherited/found £15k at 25yo. You have two options:

i) You could use it to clear your student loan now. This would save you the interest you would pay on the student loan over 40 years.

ii) Or you could (for arguments sake), stick it in a savings account earning 5% interest per year. At 65yo, your £15k would now be worth over £105k (due to compound interest - the sum is 15 * (1.05)^40, or 15 times 1.05 40 times).

Assuming 3% inflation, your student loan is now worth £48k (£15k + £33k interest, doing a similar calculation). You can now pay off your student loan entirely and you're left with £57k. (£105k less £48K)

With option i) at age 65 you have nothing, with option ii) you have £57k. I know which I'd opt for...