Unusual Student Loan Query

Hello all,
Long time browser, first time poster here, with what I think is a somewhat unusual Student Loan situation I’d like some advice on. Yes, I have read the pages on Student Loan re

I've got about 21.5k of student debt subdivided as follows:

Secion 1: ~£18,000
Interest = about 1.5%; wiped after 25 years
This is the bulk of my student loan which was for my original undergrad degree. I graduated in 2009 so this should be wiped some time in 2034-35.

Section 2: ~£3,500
Interest = approx 3%
This is the extra amount I took out in 2014 to cover the tuition fees for a PGCE. Retrospectively this was perhaps not necessarily a good idea (both the course and the loan), though it would have been difficult to find £3,500 at the drop of a hat in 2014. The rules had changed by this point and this debt requires 30 years to expire, it will be a full 10 years after the Section 1 is wiped before this is debt is wiped.

Now I’ve read the Student Loan pages so I know that generally, paying back student loans early is not recommended as many people will have their debt wiped before they have to pay it all back.

I currently earn under £25k so am not making any payments at all, though as the threshold has only recently changed to £25k I have made contributions for most of the time I’ve spent working equal to the mandatory 9% over X amount. Unless I lose my job (in which case this will be the least of my problems!) I will start making contributions again in a year or two as my pay increments will bring me over £25k. The amount I’ve repaid / will repay did/will barely cover the interest on the debts, so unless my salary goes up by a lot between now and 2034 there’s little to no chance I will pay back very much at all of Section 1 before it’s wiped. Good news, right?

Section 2 is a different matter. I've spoken to the student loans company and they have explained that the 9% contributions are subdivided between the two pots in accordance with the amount of money in each one. It is not possible for me to decide which way the 9% goes. The result of this is that, whilst the total amount I’ve paid in in the past has been slightly more than the total interest, and so the overall level of debt is (very) slowly going down, the Section 1 is decreasing whilst the Section 2 debt is actually going up, because most of the contributions are servicing the larger Section 1 debt rather than Section 2.

Once 2034 comes around, any student loan payments will go onto Section 2. As the debt is relatively small I will probably end up paying it all off by 2044 if I do nothing. This could cost me a few thousand pounds, depending on how quickly I pay it off after 2034 and how much it grows in the meantime.
The question, therefore, is
  • Should I consider repaying some or all of the Section 2 Debt now (i.e. before 2034)?
The loans company have clarified that, whilst I can’t decide where my 9% goes, any additional voluntary contributions I make *can* go to the section of my choice.

As an illustrative, if unlikely scenario, if I remain below the repayment threshold between now and 2034 (like I said, unlikely, as my current role will make me start making small payments by 2019), by 2034 the Section 2 debt will be about £5,600 (as compared to an original loan of £3,200 back in 2014). If I then had to pay off all of that I would end up paying several thousand pounds more than if I paid it all off tomorrow. A £6k debt could be paid over 10 years in monthly payments of £50, so it seems like I will ultimately have to pay off the Section 2 debts even if my Salary doesn’t climb that much (as long as it stays above the repayment threshold).

Now, I can’t afford to pay it all off tomorrow, but could afford perhaps to start paying something – and as it does now look like this is a debt I will have to repay, presumably it’s in my interest to do so as soon as possible, before compound interest makes it even worse?
I’m struggling to get my head around the mathematics of this and would just like someone to confirm that I’m not missing something totally obvious. It certainly seems to me as if – assuming my salary continues to grow, even very slowly – I will end up having to pay all the section 2 debt one way or another, in which case it would be to my advantage to do so sooner rather than later. The question is whether this is something I should give serious consideration to, i.e. is it actually a good thing for me to do with my money and I should start making the extra contributions now, or whether it’s not significant enough and I should do something different with the money, like paying off the mortgage or contributing to my pension.

Thanks in advance!

Comments

  • ViolaLass
    ViolaLass Posts: 5,764 Forumite
    I'm in a similar position. I ignore it, pay as required (no overpayments) and am focused on what else I can do with my money.
  • ahp
    ahp Posts: 4 Newbie
    If the Section 2 debt was huge (£10k+) I would also ignore it as I'd be very unlikely to pay it all off by 2044 anyway; but as it's a relatively low amount (as student loans go) the point is that I will likely end up having to pay it all off one way or another - in which case surely it makes sense to pay some off now as it's basically a loan at a 3% interest rate (thus comparable to my mortgage).
  • Lungboy
    Lungboy Posts: 1,953
    First Anniversary First Post
    Forumite
    I'm no expert on plan 1 and 2 student loans, but it seems you're mixing up some of the numbers. It's only plan 2 that currently has the £25k limit, plan 1 currently has an £18330 threshold. On a mixed plan like yours, if you're earning under £25k but over £18.3k then you should be paying 9% towards your plan 1 scheme and nothing to your plan 2 scheme. From what you've said, it sounds like you should be paying towards your plan 1 loans.

    http://www.studentloanrepayment.co.uk/portal/page?_pageid=93,6678490&_dad=portal&_schema=PORTAL has a table that shows how they will split the loan between the 2 plans once you exceed the £25k limit.
  • ViolaLass
    ViolaLass Posts: 5,764 Forumite
    But can you make more than 3% elsewhere? Yes, in your pension hopefully, and possibly in other investments.

    Plus, unlike a mortgage, this doesn't have to be paid if you lose your job or just quit because you feel like it.
  • ahp
    ahp Posts: 4 Newbie
    Lungboy wrote: »
    I'm no expert on plan 1 and 2 student loans, but it seems you're mixing up some of the numbers. It's only plan 2 that currently has the £25k limit, plan 1 currently has an £18330 threshold. On a mixed plan like yours, if you're earning under £25k but over £18.3k then you should be paying 9% towards your plan 1 scheme and nothing to your plan 2 scheme. From what you've said, it sounds like you should be paying towards your plan 1 loans.

    ...has a table that shows how they will split the loan between the 2 plans once you exceed the £25k limit.


    OK, it seems I have misunderstood how this works (and the not-so-helpful people on the phone). So I should be (and, having double checked this, you're right, I am) paying the Section 1 repayments anyway.
    ViolaLass wrote: »
    But can you make more than 3% elsewhere? Yes, in your pension hopefully, and possibly in other investments.

    Plus, unlike a mortgage, this doesn't have to be paid if you lose your job or just quit because you feel like it.


    Yes, I'm now thinking that the pension is the best place to put any leftover cash at the moment.


    Thanks for your advice both.
  • Ed-1
    Ed-1 Posts: 3,846
    First Anniversary Name Dropper First Post
    Forumite
    ahp wrote: »
    Hello all,
    Long time browser, first time poster here, with what I think is a somewhat unusual Student Loan situation I’d like some advice on. Yes, I have read the pages on Student Loan re

    I've got about 21.5k of student debt subdivided as follows:

    Secion 1: ~£18,000
    Interest = about 1.5%; wiped after 25 years
    This is the bulk of my student loan which was for my original undergrad degree. I graduated in 2009 so this should be wiped some time in 2034-35.

    Section 2: ~£3,500
    Interest = approx 3%
    This is the extra amount I took out in 2014 to cover the tuition fees for a PGCE. Retrospectively this was perhaps not necessarily a good idea (both the course and the loan), though it would have been difficult to find £3,500 at the drop of a hat in 2014. The rules had changed by this point and this debt requires 30 years to expire, it will be a full 10 years after the Section 1 is wiped before this is debt is wiped.

    Now I’ve read the Student Loan pages so I know that generally, paying back student loans early is not recommended as many people will have their debt wiped before they have to pay it all back.

    I currently earn under £25k so am not making any payments at all, though as the threshold has only recently changed to £25k I have made contributions for most of the time I’ve spent working equal to the mandatory 9% over X amount. Unless I lose my job (in which case this will be the least of my problems!) I will start making contributions again in a year or two as my pay increments will bring me over £25k. The amount I’ve repaid / will repay did/will barely cover the interest on the debts, so unless my salary goes up by a lot between now and 2034 there’s little to no chance I will pay back very much at all of Section 1 before it’s wiped. Good news, right?

    Section 2 is a different matter. I've spoken to the student loans company and they have explained that the 9% contributions are subdivided between the two pots in accordance with the amount of money in each one. It is not possible for me to decide which way the 9% goes. The result of this is that, whilst the total amount I’ve paid in in the past has been slightly more than the total interest, and so the overall level of debt is (very) slowly going down, the Section 1 is decreasing whilst the Section 2 debt is actually going up, because most of the contributions are servicing the larger Section 1 debt rather than Section 2.

    Once 2034 comes around, any student loan payments will go onto Section 2. As the debt is relatively small I will probably end up paying it all off by 2044 if I do nothing. This could cost me a few thousand pounds, depending on how quickly I pay it off after 2034 and how much it grows in the meantime.
    The question, therefore, is
    • Should I consider repaying some or all of the Section 2 Debt now (i.e. before 2034)?
    The loans company have clarified that, whilst I can’t decide where my 9% goes, any additional voluntary contributions I make *can* go to the section of my choice.

    As an illustrative, if unlikely scenario, if I remain below the repayment threshold between now and 2034 (like I said, unlikely, as my current role will make me start making small payments by 2019), by 2034 the Section 2 debt will be about £5,600 (as compared to an original loan of £3,200 back in 2014). If I then had to pay off all of that I would end up paying several thousand pounds more than if I paid it all off tomorrow. A £6k debt could be paid over 10 years in monthly payments of £50, so it seems like I will ultimately have to pay off the Section 2 debts even if my Salary doesn’t climb that much (as long as it stays above the repayment threshold).

    Now, I can’t afford to pay it all off tomorrow, but could afford perhaps to start paying something – and as it does now look like this is a debt I will have to repay, presumably it’s in my interest to do so as soon as possible, before compound interest makes it even worse?
    I’m struggling to get my head around the mathematics of this and would just like someone to confirm that I’m not missing something totally obvious. It certainly seems to me as if – assuming my salary continues to grow, even very slowly – I will end up having to pay all the section 2 debt one way or another, in which case it would be to my advantage to do so sooner rather than later. The question is whether this is something I should give serious consideration to, i.e. is it actually a good thing for me to do with my money and I should start making the extra contributions now, or whether it’s not significant enough and I should do something different with the money, like paying off the mortgage or contributing to my pension.

    Thanks in advance!

    As others have pointed out, 9% of (£25,000 - £18,330) goes towards the plan 1 loan and 9% of anything above £25,000 goes towards the plan 2 loan.

    By the way, where did you find a PGCE that only cost £3,500 after 2012?
  • ahp
    ahp Posts: 4 Newbie
    Welsh student studying in Wales...:beer:
This discussion has been closed.
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