Student debt - what you should really know

jago25_98

So much ignorance surrounding student debt it's unreal.

Pay off debts or keep in high interest account?

On the face of it student loan interest is ~3% and high interest accounts offer ~4%+ (you have to ring up for an exact figure - aggh!)

The interest rate from September 2004 to August 2005 is 2.6% per annum.

so there's no point paying off your student loan because it's earning more interest in a high interest account. Furthermore you can `lend yourself` money from this pool at a low rate.

But is it really?

I think the way that the interest on a student debt is calculated in a different way. But I'm not sure. I think it basically works out as more because it compounds interest on itself monthly, not yearly like high interest accounts do.

Prior to entering repayment interest is calculated daily at the appropriate rate from the day your loan is paid. The interest is added to your account every month.

Alot of people (such as myself) thought that by moving out of the UK you can get away from your debt. Not so:

If your income is above the threshold but you are outside the UK tax system (for example, because you are working abroad for a non-UK employer) you will have to make your repayments direct to SLC

Of course, if you're living in Thailand and earning £3000 a year (alot) then you don't have to repay but, the problem hasn't disappeared, if you need to move back the debt will be massive because you haven't been paying it off.

If you move overseas and no longer pay tax as a UK resident you must notify SLC immediately. If there is any delay in this notification, your loan will be subject to interest charges at three times the usual rate.

A default amount of monthly repayment is applied to any overseas borrowers who fail to provide the information required by SLC to enable repayment arrangements to be made. The default amount will initially be £246.00 per month.

By the way,
the threshold repayment has `increased to £1,250 per month (£288 per week or £15,000 per year).` which sounds good but actually it means you'll take longer to pay it off so they get more money! (if most people are passive about their debt, which they are)

halcyon_drift

some very interesting points. i guess a lot of the over seas senarios dont apply to the majority of readers, however more research could be done into the first point you brought up (ie the way the interest is calculated). until now, i was a firm believer that i was making money off the SLC...perhaps not now. Either way, it does come back to the old story that the interest rate charged by SLC is very competitive with high street loans, in which case it is probably still better to hold off paying for as long as possible...even if you aint making no money.

jago25_98

I'm still not entirely sure whether it's best to pay off the debt or not

Debt_Free_Chick

Whilst the maths may work out and produce an overall "gain", the first rule in financial management is to pay off debts first. Debts are a burden ... you've got them until you've paid them off. And whilst paying them off, you have no control over the repayments i.e. they must be paid towards the debt.

I appreciate that there are some unusual features with Student Loans, but there is a danger they just muddy the water. At the end of the day ... it's debt

Paul_Varjak

I think you need to compare the APR rate of the loan with the tax-adjusted AER of the interest you earn on your deposit account.

If the APR is lower and you can TRULY trust yourself not to touch any savings then put your money into savings for as long as you can - that is an MSE principle isn't it?

newfoundglory

Debt_Free_Chick wrote:

Whilst the maths may work out and produce an overall "gain", the first rule in financial management is to pay off debts first. Debts are a burden ... you've got them until you've paid them off. And whilst paying them off, you have no control over the repayments i.e. they must be paid towards the debt.

I appreciate that there are some unusual features with Student Loans, but there is a danger they just muddy the water. At the end of the day ... it's debt

I can't agree here, simply because these are student loans. A basic rule is that you should take out student loan even if you dont need it... because of the fact the interest rate is so low (its actually been going down, because it tracks RPI not the base rate)

A sensible student would put this money into an instant-access cash ISA, which means even after graduation when you are earning and have to pay tax, you can pay it back the loan as slowly as possible to take advantage of the extra 2 to 3% you can make on top whilst building up tax-free savings at the same time (5% is an easy rate to get on savings right now!)

Of course, there could come a time when its not possible to make money... but that I beleive this situation is hightly unlikely due to what would have to happen to the economy/markets. In which case you would just pay it all back.

Also, remember an unused student loan would be good cheap borrowing as a house deposit (particularly if, dare I say it, prices do CRASH).

zcaprd7

Believe me, if you lose your job (heaven forbid) you will be very happy if you have a big student loan you can defer and a large savings pot...

student100

Debt_Free_Chick wrote:

Whilst the maths may work out and produce an overall "gain", the first rule in financial management is to pay off debts first. Debts are a burden ... you've got them until you've paid them off. And whilst paying them off, you have no control over the repayments i.e. they must be paid towards the debt.

I appreciate that there are some unusual features with Student Loans, but there is a danger they just muddy the water. At the end of the day ... it's debt

If you are disciplined enough to manage debt well, there is such a thing as good debt; for example a mortgage is good debt - instead of paying rent for years (which leaves you with nothing in the end), you can pay a similar amount each month but you actually get some capital back afterwards (you have a house to sell).

Student loans are "good debt" in that they cost you less than the benefit you get from the money - stick it in a savings account at 5% and you're quids in. (or, if you do need to use the money, it's almost certainly cheaper to spend the student loan than the next available form of finance). The same prinicple applies to stoozing on credit cards at 0%, as discussed elsewhere on this site. What's more, if the money is sat in an instant access savings account you could pay it all off if you needed to, so it's not really "debt" in the traditional sense (it's not a liability).

zcaprd7

Mortgage versus rent is never that straight forward (off topic alert):

My rent is less than the interest part of the mortgage required to buy the place...

student100

Well yes, it's a whole lot more complicated than my very general statement above, but the underlying theory is sort of right

Savvy_Sue

zcaprd7 wrote:

Mortgage versus rent is never that straight forward (off topic alert):

My rent is less than the interest part of the mortgage required to buy the place...

Well yes, but the general idea is that at the end of the mortgage you have a house you can sell if you need the money, whereas at the end of the tenancy all you have is your deposit back, if you're lucky!

Back on topic: I suppose the problem arises when you have to start paying back the student debt because you've spent it rather than saved it. I think I've read elsewhere that it's a straight % of your earnings over the payback limit, without any regard to what you're needing to do with the remaining %. So I think what the OP was saying was that if for any reason you can only afford to make the minimum student loan repayments, and you're making them for a long time because you are barely over the payback limit, that debt from your loan will continue to accrue interest, and even though the interest rate is low it still adds up to a lot of money and possibly paying back at a higher rate of interest than you were expecting because it's over a longer period of time.