Postgraduate loan repayment

InternationalTeacher

Hi,

I have read the articles on student loan repayment but I just wondered if someone could give me some advice specific to my situation please.
I have a student loan (pre 2012) of approx £30,000. In 2016-2017 I took a £5,000 post graduate loan. I finished the course in November 2018. When I recently checked my statement my PGL is current £5,660 due to the interest. The interest for my PGL is 6.3% and for my undergraduate load much lower.
I am currently working abroad and soon I’m due to receive 4 and a half months wage in one go (end of contract/summer pay). I will have about £15,000.
My questions are:

Should I pay off my PGL in full in 1 go with some of this money due to the high interest rate? (I’m not too concerned with the undergrad one).
I am moving to a European city soon with a much lower wage, but concerned if I don’t pay that PGL off then I will have 2 large monthly repayments for both loans (cost of living is lower so I think my overseas repayment might be quite high).

Should I just stick to the normal monthly loan repayments and use the £15,00 to put into savings?

Should I pay off a lump sum on my mortgage? (Mortgage is about £67,000 but currently make £400 overpayment each month). I have no other savings.

Any advice is appreciated, thank you.

Voyager2002

You don't give your age; more importantly, how long until your loans are written off. If it is likely that the loan might be written off unpaid then making efforts to repay it early would be counter-productive; otherwise, it makes sense to pay off loans starting with the one with the highest interest rate.

JayRitchie

Is this the government postgrad loan or a private one? You probably need to note your age, sex, profession and level of earnings for anyone to make a meaningful comment.

InternationalTeacher

Thanks for your replies. I’m female, 36, and a teacher. The PGL was only taken out 2016-2017. It’s the government loan from the student loans company. I will be moving to Prague with a wage of approx £32,000 and will their pay tax etc. When looking at the overseas contributions it seems quite high for the undergrad loan but from what I understand I will also pay back the PGL at a higher percentage (I’m not certain on this). I don’t have any other debts/loans as these have been paid off. Many thanks for your help.

[Deleted User]

JayRitchie wrote: »

Is this the government postgrad loan or a private one? You probably need to note your age, sex, profession and level of earnings for anyone to make a meaningful comment.

What on earth does someone's sex have to do with repayment?

JayRitchie

_shel wrote: »

What on earth does someone's sex have to do with repayment?

It depends on the rules of the loan. For example recent undergrad loans are charged on income over approx £26k for 30 years with the remainder written off at the end. As such its very safe borrowing - if you lose your job you don't pay, have time out for children, maternity leave etc you don't pay if your earnings fall below the £26k level. This matters for practical decision making.

[Deleted User]

Fair enough thank you hadn't thought of that.

JayRitchie

Thanks for the response. You really are a teacher - thats an exam question from hell!

For real detail you would need specialist tax advice from a firm experienced in Czech and expat tax affairs. Depending on the type of school you will be working for they may provide this. If not it may well be that the the amounts of money concerned don't really justify the kind of fees you would pay.

I guess as you've taught abroad elsewhere and are now moving to Prague you are somewhat of a career overseas teacher? This could be a factor to consider (or to ask if you get professional advice). Some possible considerations:

- if you rent out a flat in the UK what is the impact on taxation in Czechia/ other countries you may move to?
- are educational loans in other countries tax deductible in the country in which you would pay tax? If so is the tax deduction based on interest paid or total payments?
- Any lump sum/ completion of contract bonuses - these are likely to lead to additional student loan payments.

One area to really consider is how much you should have in savings/ emergency money. Lets say you want or need to return to the UK in a rush (or leave your new job and look for another one elsewhere). Its somewhat hard to borrow money without a job and living in another country. So how much might you need?

Well, if you would move in with parents until you have an income and could borrow one of their cars - not much really. I dunno - £250 to get home plus say £3k until you get an income?

If you were able to move into your own flat - so need to pay mortgage bills etc - a fair amount more (£5k?). Would you need to buy a car in order to do cover work or apply for jobs? That can cost a lot - plus insurance is more expensive if you are not working.

Its worth spending 10 minutes doing a quick calculation. If you had to pay market rent, get a car and cover living costs for a while you need a fair amount of savings. When I was working abroad most people I chatted to were making such calculations and provisions.

Likewise you need to consider the cost of significant home repairs - particularly if you get tenants.

Looking at the areas you have touched upon:

1) Undergrad student loan - pre-2012 so type 1. I'm assuming from your age that you started your first degree before the 2006/7 academic year so any balance remaining will be paid off when you hit 65. I'm also assuming that you have English loans.

I don't believe in paying off type 1 student loans any faster than required. The interest rate is only (at present) 1.75%. You could easily match or beat this in an ISA (overseas tax rules may change this calculation). The money is far better in your own rainy day fund. Plus if your income drops so do your repayments.

2) Postgrad student loans. These are charged at 6% of earnings above a threshold - £21,000 a year. for UK residents. I'm not clear whether this inflates. The interest rate (RPI + 3%) is currently 6.3% but should reduce shortly as RPI has been lower this year.

On a UK salary of £32,000 you would repay £660 pa and incur interest costs in the next year of about £350. Assuming that the interest reduces to about 5.5% it would take around 12 years to clear the balance incurring about £2,300 of interest costs.

The benefit of not paying is that you can do something else with the money and have reduced the financial risk of time out of work, long term illness etc. If you get, say, 1.8% in an ISA you pay 3.7% for this benefit. Might be worth it? Maybe less so than many other professions as teaching is an in demand job, and anyone who get get a job in a place like Prague must be in demand.

Looking at the student loans website it seems that the lower limit for people living in Czech is £12,600 a year. Based on an income of £32,000 this would leave you paying £1,164 per year clearing the balance in a little under 6 years at an interest cost of around £1,000.

Now to make it more complicated I think - from reading tax websites - that your rental income may be liable to student loan repayments also with no interest deductions from 20/21 (and limited in 19/20). Not certain about this and there is some political heat around this area in the Conservative Party so the details may change.

If you had taxable income from renting out your flat of £10,000 a year your graduate loan payments increase to £1,764 pa based on a lower limit of £12,600. You would clear the balance in a bit over 3 years at an interest cost of around £750.

3) Reduce mortgage - the value of this depends on your interest costs - which may increase under a BTL mortgage. Possibly paying a lump sum could get a cheaper mortgage deal overall which is worth checking, depending on current loan to value.

4) Keep in savings - clearly the safe option so long as its in a protected bank account. If you have any debt (including mortgages) there is almost always a cost to keeping accessible cash.

For me, I think that as you are abroad (so less easy to borrow money in an emergency) you should consider having a decent sized emergency fund. How much? Depends on a lot of factors. If we think of the cost of a major home repair or to relocate without a job perhaps build up to £20k? That's what I would do before paying down the mortgage unless there was a clear saving from doing so to be weighed up against the risk.

On the other hand I would be tempted to pay of the graduate loan. My guess is that you will end up paying off the balance so could benefit from the additional cashflow each month and the overall interest saving, plus it seems a lot of hassle doing the administration to deal with student loans from abroad. Might be worth checking if and how much the early payment fee would be - this is hard to establish on the website.