Early Loan Repayment - 2012 Student

oskarm93

Hello,

I'm a 2012-starter student on a 3-yr course due to finish this year.
My student loan debt is estimated around £44K.
My starting salary will be £31250 (+2.45% annual inflation).

My minimum annual repayments will be (31250-21K) * 9% = £922.5. According to the calculator on this website, the debt will be wiped after 30 years, total sum repaid being £83K.

Should I pay it back early, assuming I can spare £9K every year from the start of my work? This would roughly allow me to pay back the entire loan in about 5 years (and definitely less than £83K).

My spare is already taking living costs and pension contributions into account.

Thanks in advance.

silvercar

If you feel that it is safe to assume you will be a high earner then it makes sense, in that you will pay far less overall (mainly thanks to the outrageous interest rate, currently 5.5%).

Though against this, you could be saving the 9k a year towards a house deposit etc. Which may save you money (mortgage vs rent, lower mortgage rate with higher deposit, getting on the house ladder earlier, house price inflation runs high generally).

Ed-1

oskarm93 wrote: »

Hello,

I'm a 2012-starter student on a 3-yr course due to finish this year.
My student loan debt is estimated around £44K.
My starting salary will be £31250 (+2.45% annual inflation).

My minimum annual repayments will be (31250-21K) * 9% = £922.5. According to the calculator on this website, the debt will be wiped after 30 years, total sum repaid being £83K.

Should I pay it back early, assuming I can spare £9K every year from the start of my work? This would roughly allow me to pay back the entire loan in about 5 years (and definitely less than £83K).

My spare is already taking living costs and pension contributions into account.

Thanks in advance.

silvercar wrote: »

If you feel that it is safe to assume you will be a high earner then it makes sense, in that you will pay far less overall (mainly thanks to the outrageous interest rate, currently 5.5%).

Though against this, you could be saving the 9k a year towards a house deposit etc. Which may save you money (mortgage vs rent, lower mortgage rate with higher deposit, getting on the house ladder earlier, house price inflation runs high generally).

You've got to factor in inflation. £83000 over the course of 30 years is worth a lot less than £83000 over the course of 5 years.

£100 was worth a lot more in 1985 than it was in 2010.

The interest rate of 5.5% is really only a real rate of 3% as the extra 2.5% is the inflation rate and that will drop to less than 3% (real) in the April after you finish studying (providing you're earning less than £41000).

So you've got to factor in inflation and not treat £83000 as a nominal figure that is worth the same in 30 years as it is now as it isn't.

Factoring in inflation, if you still think you'll be better off paying it off early than there's nothing stopping you. But the fact that you're likely to have some written off after 30 years is telling me that you may be better off just making the minimum repayments as even with the real interest added on, you're still not repaying the full loan within 30 years.

As a rough example, assuming inflation is 2.5% every year for 30 years:

Debt is worth now in nominal terms: £44000.

In nominal terms, the same amount in 30 years is: £92500 (i.e. it has been inflated by inflation of 2.5% for 30 years).

That figure of £92500 is the amount without any real rate of interest added on and is more than the £83000 you're likely to pay off. So paying off the full balance early would not be a good idea in this example, as in 30 years you'd have paid off less than what you started with (£44000) in real terms. Add to that that you have lost a lot of disposable income by paying off early.