Saving vs Student Loan - a question

Lavendyr

Hello I have quite a large student loan (£16.5k), which I started paying off in April 2007. This is the only debt I have. So far this year my PAYE contributions will have been just enough to keep it from going up significantly (i.e. they barely cover the interest).

Starting this month, I have a pay increase of £6k per annum, meaning I will be paying approximately 3x more off my loan through PAYE than I have been until now. However, with the student loan rate also going up to 4.8% in line with RPI, I will still only be covering the interest with my repayments, despite the increase in earnings.

At 2.4% it was not worth making additional repayments on the loan, as I can earn more interest by putting my money in savings accounts. But at 4.8% I have been thinking a lot more about what to do next. I hate having this debt hanging over my head.

However, my OH and I are also looking forward long-term to buying a house. And when this happens, we will want as much of a deposit as possible. The greater the deposit we can put down, the less we will have to borrow. And borrowing on a mortgage is likely to be at a higher level of interest than the student loan. So in that respect, it makes more sense to save as much as possible to that end, and continue to make only the PAYE payments off my loan.

Currently my plan goes as far as maxing out my cash ISA allowance each year as that is far enough above the interest rate on the loan to make it worthwhile. However, beyond that I am undecided. On the one hand I like the idea of taking a decent chunk out of my loan. On the other hand, saving (in a regular saver as I would be saving approx. £400 a month) would give me more flexibility and would be very handy towards a deposit.

I would be very grateful for more expert opinions - and if there is any information missing from the above post that would be required, please ask. Many thanks!

- Lavendyr

CLAPTON

- you can earn 7.1% in Yorkshires BS regular saver ... 5.68% after tax
- and it may well be better to have a decent deposit for a mortgage than pay off the student loan

and if later you change your mind you can always make a lump sum payment

so i'ld save rather than repay.

morg_monster

I would definitely save rather than repay for all the reasons that you and CLAPTON put.

Just remember - once you put the money towards the loan, you can't get it back again. Who knows what will happen in the future that you might need cash for. At best, you need the money as a deposit for a house. At worst, you lose your job or someone gets pregnant.
Since net savings rates are still (just!) higher than 4.8%, keep hold of the cash for now. as Clapton said, if in the future you want to pay off a big lump you've still got that option. But for now keep your savings as just that, savings.

sly_dog_jonah

Pick a market leading Mini Cash ISA for the first £3k of your individual savings. Your OH should do the same. NS&I at 6.3% is a very popular choice and has followed BoE Base Rate rises quickly, its also very easy to open.

Drip the rest into on or more Regular Savers, pick ones that are as flexible as possible. The ability to save over a period of more than 12 months is an advantage as the interest rates are much better than standard savings accounts and the interest can compound at this better rate for longer. The ability to change your monthly contribution is also good, just make sure you put in at least the minimum as otherwise the T&Cs will mean a drop in interest. Also look at how many penalty free withdrawals are allowed.

I have a YBS Regular Saver 7.1% Gross and LTSB 2-year regular saver 8% Gross (but this is only available as a one-year product now). The YBS is great as you can put £500 in a month, LTSB has the advantages of missing payments (i believe), unlimited withdrawals and the ability to kick start the account with an extra £500 opening deposit. Don't forget, your OH can open Regular Savers too.

Check this thread for a great summary of what's available.

Hopefully the RPI will reduce by March next year when the Interest Rate for SLC loans is set for the period Sept 2008-2009 and by this time you will be making a tidy profit on your tax free and regular savings. The loan will not count against you except that some mortgage lenders may take your repayments into account, but many won't. It will never appear on your Credit Report so will never affect your ability to get cheap credit.

Good luck in your pursuit of that FTB deposit, there are many of us like you

JoeA81

I agree with what you and everyone else has said, for all the reasons that have already been mentioned. It makes more sense to not repay the debt any faster than you have to.

I think all that is needed is a little change in the way you see this 'debt'. You used quite a negative phrase "I hate having this debt hanging over my head". As MSE Martin says there is good debt and bad debt, and I think that the student load easily falls into the good debt camp - no effect on credit report and barely any effect on getting a morgage as sly_dog_jonah says above.

Start looking at it in a positive light, and you wont worry so much about having 'to pay it off as soon as possible' just because of a desire to be 'debt free'. From what I have read on these boards there is no financial advantge to paying it off early, and some considerable financial gain to be made by only making the minimum payments.

Personally, I plan to pay my £14.5K loan back as slowly as possible. When I look at my payslip, I dont see it as a debt, I see it as just another tax reducing my net pay slightly!

Lavendyr

Hello Thank you everyone for the comments - to be honest you are telling me exactly what my head is telling me, that it is more sensible to save the money - it is, as you say, a matter of thinking about the debt in the right way. It is nice to have the reassurance that others also think it is the most sensible thing to do!

sly_dog_jonah wrote: »

Pick a market leading Mini Cash ISA for the first £3k of your individual savings. Your OH should do the same. NS&I at 6.3% is a very popular choice and has followed BoE Base Rate rises quickly, its also very easy to open.

Thank you I have already opened an NS&I cash ISA, which I am £350 away from filling up. I will hopefully fill it up next month or the one after, depending on what my car MOT bill looks like in September... :silenced: .

sly_dog_jonah wrote: »

Drip the rest into on or more Regular Savers, pick ones that are as flexible as possible. The ability to save over a period of more than 12 months is an advantage as the interest rates are much better than standard savings accounts and the interest can compound at this better rate for longer. The ability to change your monthly contribution is also good, just make sure you put in at least the minimum as otherwise the T&Cs will mean a drop in interest.

This is what I would have hoped to do, however come April next year I will want to start focusing on maxing out my ISA allowance again, which at £400 per month would happen with 3 months to spare at the end (taking into account th enew £3600 limit next year). So bearing that in mind I'm not sure a Regular Saver would be best for me after all, as I would rather fill my ISA as quickly as possible. In October my current Regular Saver will mature and I will open a high-interest savings account for that, so perhaps it would just be best to use that same savings account after filling up my ISA each year, rather than a Regular saver. What do you think?

JoeA81 wrote: »

I think all that is needed is a little change in the way you see this 'debt'. You used quite a negative phrase "I hate having this debt hanging over my head".

That is very true Up until the rate increase it has been easier to think of it as "good debt" but the rate increase had me more worried. As far as I know, my loan isn't going to be written off in 25 years as I got it before that came into effect, so I could conceivably be paying it off until I'm 60, which is a less-than-pleasant thought, but I think it is probably better to gain some liquidity and save for a deposit to reduce future borrowing, as you have all advised me.

morg_monster

Just wanted to say one more thing. Remember that 4.8% interest rate is just for 12 months from Sept 07. It could well go down again next time so it isn't quite so bad compared to savings rates as it is this year. Since I started uni in 1999 the rate has been as low as 1.3%!! It is just bad or good luck if the March RPI is much higher/lower than the average for the year. But overall it evens itself up I guess. So really you don't want to pay off any loan just based on the interest rate for 1 year!! Next year you might be kicking yourself! But sounds like you knew all this, but anyway don't let the current high rate put you off too much.

Just looking at the RPI in March of each year compared to the bank Base Rate:
Year RPI Base rate
1999 2.1 5.5
2000 2.6 6.0
2001 2.3 5.75
2002 1.3 4.0
2003 3.1 3.75
2004 2.6 4.0
2005 3.2 4.75
2006 2.4 4.5
2007 4.8 5.25

(Just pray we don't see return to 20% plus interest rates of the late 70s / early 80s!!):eek:

baby_boomer

The Bank of England's job is to get the inflation rate down. A slight problem is that they are targeting another inflation rate (excluding mortgage costs), not the one (RPI) the student loan is based on.

However if they are successful, as I expect, the 4.8% RPI rate should also fall .

In the meantime, as others have pointed out, ISAs (first) and the excellent YBS regular saver (second) are the way to go ) as you can still beat this 4.8% (gross with ISAs and net with regular savings) even before it falls .

High inflation, combined with student debts = lower educational standards = long term disaster for a high wage economy.

Escalating student debt also becomes an ever growing political reason for government to keep the lid on inflation, whichever party is in power.

sly_dog_jonah

Lavendyr wrote: »

This is what I would have hoped to do, however come April next year I will want to start focusing on maxing out my ISA allowance again, which at £400 per month would happen with 3 months to spare at the end (taking into account th enew £3600 limit next year). So bearing that in mind I'm not sure a Regular Saver would be best for me after all, as I would rather fill my ISA as quickly as possible. In October my current Regular Saver will mature and I will open a high-interest savings account for that, so perhaps it would just be best to use that same savings account after filling up my ISA each year, rather than a Regular saver. What do you think?

Yep I agree, the ISA should always be your first point of call as you have the flexibility to fill it as fast as you can, plus the short term and long term tax incentive. If you are adding money throughout the year to an ISA from income (rather than depositing lump sums early in the tax year) then a Regular Saver is only really relevant if you have a surplus to save most months. Remember though that some RS's are very flexible, eg the Yorkshire BS one allows you to have a small standing order, and top it up with more BACS transfers later in the month so long as you don't exceed the max monthly contribution. The only big restriction is the single withdrawl allowed before the interest rate halves, it depends on how quickly you think you will need this money? And remember, the YBS RS can keep on growing for more than a year or two like most RS products. But for flexibility, you can't really beat a Sainsbury's 6.25% or ICICI (although I advise against the latter, but that's from personal experience).

ashm1

At the moment it's looking like a dash to the cash / gilts .

Mortgage lenders may require a higher deposit in the near future.

Lavendyr

sly_dog_jonah wrote: »

If you are adding money throughout the year to an ISA from income (rather than depositing lump sums early in the tax year) then a Regular Saver is only really relevant if you have a surplus to save most months.

*nods* This coming year (i.e. from April 08) will be slightly different from the current one for me, since this year due to a generous performance-related bonus in May, I was able to save a lump sum early in the tax year into an ISA - however, although my income throughout the year will be higher as a result of my pay-rise, I am not expecting a similar bonus so rather than paying in a lump sum it will be a monthly drip-feed into my savings, wherever they may be. I will however have a surplus every month so paying *something* into a Regular Saver each month shouldn't be a problem - it's just a question of getting the timing and amount right with regards to when I will want to start contributing to my ISA again.

sly_dog_jonah wrote: »

Remember though that some RS's are very flexible, eg the Yorkshire BS one allows you to have a small standing order, and top it up with more BACS transfers later in the month so long as you don't exceed the max monthly contribution.

That's really useful to know, I hadn't realised that. I've had a RS with A&L since November last year which I have only been able to contribute a fixed amount to (which was specified at the start of the 12-month term). Obviously A&L was higher interest but the flexibility is much more valuable to me given my situation.

sly_dog_jonah wrote: »

The only big restriction is the single withdrawl allowed before the interest rate halves, it depends on how quickly you think you will need this money?

I don't expect to need it very soon, especially if I set up only a smaller standing order in the first place - since I will then be able to decide whether I top it up later in the month or keep it in an easy-access savings account. So the single withdrawal should be no problem (again it feels quite generous after a year of A&L - no withdrawal without losing interest).

sly_dog_jonah wrote: »

But for flexibility, you can't really beat a Sainsbury's 6.25% or ICICI (although I advise against the latter, but that's from personal experience).

I've seen a few people have had trouble with ICICI on these boards, so I will certainly be avoiding them! I have heard good things about Icesave too, though I see that the Sainsburys rate is slightly better currently. Is it possible to set up a standing order from such a savings account directly into a regular saver, do you happen to know?

So, plan so far: Once my car MOT has been & gone (last year cost £650 so nervously awaiting this year's!) and my current RS matures in October, I will top-up my ISA to the limit, then open an instant-access savings account and drop the remainder into it. Then open a new RS, probably the YBS one as it sounds perfect for my needs, with a low monthly standing order. Top this up with transfers as much as possible until April 08 when I will carry on with the RS standing order, but put the rest into ISA contributions rather than topping up the RS. Any surplus goes into the instant-access saver. How's that sound?

Thanks again for all your (and everyone elses') help