Student loan - should I pay off early?

coffeekat

Hello. I'm looking for some advice regarding my student loan payment.

I have managed to build up fairly substantial savings during this year, for which I'm very grateful and appreciate I am aware I am lucky to be in this position. 

I have 5 years left on my plan 1 student loan payments (around £5k) and wondering if I should use my savings to pay this off now. I know that the general wisdom is not to do so due to the good interest rate on the loan etc and that the money would usually be better invested in savings accounts with a higher interest rate. However my loan payments are being charged at 1.1%, and the best I can seem to do re savings accounts is around 1% even in a fixed term account. General feeling seems to be that interest rates are unlikely to raise for a while yet. So to me, paying off the loan seems to make financial sense. However I'm pretty sure I must be missing something  obvious given all the online advice seems to imply its better not to pay off early! So I would really appreciate any advice anyone can give in this situation.

Just in case it helps, I put away £4k into my LISA this year, will do the same again in April.  I will keep enough back to add a further £4k for the next two years. I also have enough to support myself for 10 or so months in an emergency fund, have no debts that need paying, and am not planning on getting a mortgage for at least 10 or so years time (personal reasons of needing to live close to elderly parents for the foreseeable in an area I can't buy in on my salary). 

I'd really love any thoughts on this. Finance is not my strong point so there is likely something I have forgotten when looking at the loan!

DrEskimo

No, in your situation there is no reason to not pay it off in full now and save on the interest you would be charged.

How much do you pay out of your salary each year? I know when mine reaches that sort of level I plan on settling it as I don't want to deal with trying to reclaim anything I overpay as a result of still paying through my salary.

coffeekat

How much do you pay out of your salary each year? I know when mine reaches that sort of level I plan on settling it as I don't want to deal with trying to reclaim anything I overpay as a result of still paying through my salary.

 Thanks for your response! It's out my mind at ease to know I've not missed something obvious In response to this, I pay about £92 per month, so will be nice to be able to contribute that to my pension each month instead, especially as my employer has recently dropped their contribution by 4%!

DrEskimo

coffeekat said:

How much do you pay out of your salary each year? I know when mine reaches that sort of level I plan on settling it as I don't want to deal with trying to reclaim anything I overpay as a result of still paying through my salary.

 Thanks for your response! It's out my mind at ease to know I've not missed something obvious In response to this, I pay about £92 per month, so will be nice to be able to contribute that to my pension each month instead, especially as my employer has recently dropped their contribution by 4%!

Well you could contribute the £5k towards your pension today (and reclaim the tax saving) and that should give you a better return than the interest your paying on your student loan.....but for ease and the feeling of just having it gone, clearing the loan certainly wouldn't be a bad option!

MalMonroe

The advice not to pay off student loans is not because the interest is low (although that is a good thing) - it's aimed at those graduates whose income is less after graduation than the threshold amount for their respective repayment plan.

Obviously your salary is more than the threshold amount for your repayment plan so it makes far more sense for you to pay it all off as soon as possible, as you are in a position to do so. 

goodwithsaving

I have been doing the same sums today, for a similar amount remaining on the same payment plan!

Put £5000 on mortgage and carry on overpaying £200/month

or

Pay off student loan (1.1%), save the £150/month that is taken out of my salary and overpay the mortgage (1.9%) by £350/month. Plus put £5000 onto mortgage on re-mortgage in a few years.

No other debts. Just mortgage and student loan. Currently save well and in stable employment (very fortunate), but I have felt like the student loan is a bit of a weight since my very first loan advance many years ago.

It probably seems like chasing sums but I heavily doubt we will be getting a state pension, and our existing pension schemes (I pay in a substantial sum each month and have since I was 21) are likely to be amended to make retirement rather difficult so I'd like to work hard and pay things down now, and see the benefit later.

Decisions.

kimwp

The question for you is whether the savings interest would rise within the time you would still have had a significant amount to pay on the loan, making it better to not pay it off. Given that the student loan is only paid as a percentage over the earning threshold, my personal approach in your situation would be to not pay it off in case you lost your job or had an unexpected large expense (even with the 10 month salary fund, but I'm very cautious) - although it would be annoying to be losing out financially. 

In terms of paying it back to avoid having to reclaim, what I have been told about the timings is it's best to call them on your payday with your payslip handy because the process is lengthy:
1. SLC: 3-5 working days to process your payment
2. SLC inform HMRC the following Wednesday
3. HMRC update their records on the Thursday and tell your company to stop the payments on the Friday.
4. Your company will have a cut-off date for making changes to pay.