Student loan advice

adonis10

So, I have an income contingent student loan which I took out prior to 2005/06. I have 16k outstanding and interest accruing at 0.9% per annum, some £144 per year. I am paying off circa £1k per year through PAYE, so reducing the total by around £850/year (subject to interest rate changes).


Usually, the advice is to pay off debt that is attracting a higher interest rate than savings are achieving, however I wonder if this advice still applies to a loan that will be written off at 65? Let's say I had 16k at 0.1% (my rates are better but this is hypothetical) would you pay it off? Assuming repayments and rates remained the same (again, hypothetical) it would take 19 years to repay through PAYE. My feeling is that investing my 16k capital should produce a better return than the interest saving therefore there would be no benefit to paying it off now versus over the next 19 years, surely it is better to invest the 16k now rather than 1k per year (saving from not paying 1k/year through PAYE)/?


This is all subject to the government not suddenly deciding to change the terms* and apply credit card style interest rates etc., so can only base my decision on what I know now.


Interested in any thoughts.


*Edit - I have just been reading about the planned sale of part of the loan book here http://www.studentloanrepayment.co.uk/portal/page?_pageid=93,3866911&_dad=portal&_schema=PORTAL


It suggests that loans that entered repayment between 2002 and 2006 are impacted which should exclude mine, however I am sure that more will be sold in the future. From reading that, I am under the impression that the terms, interest rate etc. will not change however my distrust of the government and profit making companies make me incredibly sceptical of this,

Lokolo

For me, I was paying around £250 a month on my loan and I knew this wasn't going to be a short term situation so my loan was going to be paid off in a couple of years.

I chose to overpay for 12 months and then pay off the last £3k or so in a lump sum which I did in February.

Financially I would have had that £3k and additional £100 a month in a savings account and maybe earned £50 or so interest over the interest paid from the loan in a year.

Personally my financial priorities are
- House
- Pension
- Some Savings
- Pay Off Student Loan

adonis10

I've had a think since posting and am veering towards just continuing with the minimum payment. The reason being is because if I overpaid it would be about £50 a month so not enough to significantly eat into the debt therefore, say, the terms change in 3 years time I will still have to shell out a large chunk of my savings anyway to avoid a higher rate. As such, I may as well continue saving that £50 at 3-5% or investing in stocks and shares ISA and then when the inevitable letter comes advising me of a massive rate hike by the gov/private company I can then work out what to pay off and when.

chockydavid1983

The usual advice with loans from that period is to just keep paying the minimum through PAYE.
The interest rate is so low that the rate can easily be beaten in current and regular savings accounts.
Also, if you need to borrow for house, car etc, then the rate would be a lot higher and you'd regret paying off the low interest loan.
I paid mine off at the end of the last financial year when there was about £1k left.

It's similar to the overpay mortgage/ invest debate. I do the latter as my mortgage rate is 1.99%, which can be comfortably beaten by current and regular savings accounts and should also be beaten by investments in the long run.

Some people prefer psychologically to pay both debts down but maths and logic suggest the opposite.

adonis10

chockydavid1983 wrote: »

The usual advice with loans from that period is to just keep paying the minimum through PAYE.
The interest rate is so low that the rate can easily be beaten in current and regular savings accounts.
Also, if you need to borrow for house, car etc, then the rate would be a lot higher and you'd regret paying off the low interest loan.
I paid mine off at the end of the last financial year when there was about £1k left.

It's similar to the overpay mortgage/ invest debate. I do the latter as my mortgage rate is 1.99%, which can be comfortably beaten by current and regular savings accounts and should also be beaten by investments in the long run.

Some people prefer psychologically to pay both debts down but maths and logic suggest the opposite.

Makes sense. I guess my rationale behind possibly overpaying was to bring it down before the inevitable rate hike, however I should just consider and deal with that when it happens. It may not happen for 3, 5, 7 years so probably best to stop second guessing, pay the minimum and deal with it when I need to.

chockydavid1983

Yeah, that's what I'd do.
In the mean time, you can comfortably beat 0.9% on your cash and it's there ready to pay down the debt if and when rates do rise.

adonis10

chockydavid1983 wrote: »

Yeah, that's what I'd do.
In the mean time, you can comfortably beat 0.9% on your cash and it's there ready to pay down the debt if and when rates do rise.

Exactly, and the worst rate I am currently getting is 1.5% so no action required!

Ed-1

adonis10 wrote: »

So, I have an income contingent student loan which I took out prior to 2005/06. I have 16k outstanding and interest accruing at 0.9% per annum, some £144 per year. I am paying off circa £1k per year through PAYE, so reducing the total by around £850/year (subject to interest rate changes).


Usually, the advice is to pay off debt that is attracting a higher interest rate than savings are achieving, however I wonder if this advice still applies to a loan that will be written off at 65? Let's say I had 16k at 0.1% (my rates are better but this is hypothetical) would you pay it off? Assuming repayments and rates remained the same (again, hypothetical) it would take 19 years to repay through PAYE. My feeling is that investing my 16k capital should produce a better return than the interest saving therefore there would be no benefit to paying it off now versus over the next 19 years, surely it is better to invest the 16k now rather than 1k per year (saving from not paying 1k/year through PAYE)/?


This is all subject to the government not suddenly deciding to change the terms* and apply credit card style interest rates etc., so can only base my decision on what I know now.


Interested in any thoughts.


*Edit - I have just been reading about the planned sale of part of the loan book here http://www.studentloanrepayment.co.uk/portal/page?_pageid=93,3866911&_dad=portal&_schema=PORTAL


It suggests that loans that entered repayment between 2002 and 2006 are impacted which should exclude mine, however I am sure that more will be sold in the future. From reading that, I am under the impression that the terms, interest rate etc. will not change however my distrust of the government and profit making companies make me incredibly sceptical of this,

I'll just make 2 purely factual points about the likelihood of further changes to the main repayment terms of pre-2012 ICR loans:

• The current interest rate on pre-2012 loans is 1.25% (base rate + 1%).
• The maximum rate than can be charged for loans taken out in respect of courses starting before 1st September 2012 is set down in primary legislation: section 22 of the Teaching and Higher Education Act 1998 sets out in subsection (3)(a) that regulations may be made “for such loans to bear compound interest at such rates, and calculated in such manner, as may be prescribed from time to time”. Subsection (4)(a) sets out that “the rates prescribed by regulations made in pursuance of subsection (3)(a)—
  (i) shall be no higher than those which the Secretary of State is satisfied are required to maintain the value in real terms of the outstanding amounts of such loans, and
  (ii) shall at no time exceed the specified rate for low interest loans”
  
  http://www.legislation.gov.uk/ukpga/1998/30/section/22
  
  The fact the loans are being sold and therefore no longer on the Government's books makes it even more unlikely more primary legislation would be introduced to amend this (and only primary legislation - which both Houses of Parliament must vote through several stages - can amend previous primary legislation).
  
  The regulations made under this Act set out this in more detail: http://www.legislation.gov.uk/uksi/2009/470/regulation/21/made
  
  While the regulations can be changed much more easily at the whim of a minister, even the repayment threshold has been fixed for pre-2012 loans at an annual RPI uplift (regulations 4 and 12 of these regulations http://www.legislation.gov.uk/uksi/2014/651/note/made) making it more unlikely that this formula would be retrospectively changed too.
  
  The cancellation date of age 65 for pre-2006 loans is also set down in the regulations http://www.legislation.gov.uk/uksi/2009/470/regulation/19/made.

cheesetoast

The first question is always this - are you going to pay it off before you retire, or will some get written off?

If even one penny will get written off, then don't bother overpaying at all.

If you'll probably end up paying it all off anyway, that's when the calculator needs to come out.

adonis10

cheesetoast wrote: »

The first question is always this - are you going to pay it off before you retire, or will some get written off?

If even one penny will get written off, then don't bother overpaying at all.

If you'll probably end up paying it all off anyway, that's when the calculator needs to come out.

Based on current interest rates and salary, unfortunately it'll be paid off before I am 65. Obviously we don't know what happens to rates in the future, could be 10% in 10 years time in which case interest would well overtake repayments.

kidmugsy

adonis10 wrote: »

I am under the impression that the terms, interest rate etc. will not change however my distrust of the government and profit making companies make me incredibly sceptical of this,

Can you think of an example of the government tearing up a contract with a taxpayer? It must have happened but I'll bet it's very rare. I mean an actual contract, not some pretend-contract of the sort that people like to invent so that they can fulminate about it.