Student Loan - Should I Pay It Off? (High Earner, Excess Capital, Plan 2)

ajs117

As of today 17/12/2020, my student loan plan 2 balance is £57,376.20, eye-watering I know. I am 27 years old and I am classed as a high earner (£50k p.a. total inc bonus) and this is likely as I get more senior in my position, meaning I will be paying the 5.6% interest rate. I currently have capital in investments but also £50k in Premium Bonds which are only getting 1% at the moment. I do plan to buy a property in the near future, have funds in the Premium Bonds is not essential/earmarked for that. Would it be wise for me to pay off the balance or a chunk of it as it is charging more interest than I am making from the Premium Bonds or should I keep it?

Giddypip

You don't earn any interest on premium bonds, the 1% is the prize fund.

ajs117

Giddypip said:

You don't earn any interest on premium bonds, the 1% is the prize fund.

I didn’t say it was earning interest...

DrEskimo

It's a difficult one.

Unlike other debts, your student loan repayments are directly linked to you salary, so if you lose your job, there is no worry about having to pay anything towards it. Likewise it gets written off after 30-yrs. It therefore doesn't carry the same financial risk as other consumer debt.

However, at 5.6% and as a higher earner it will certainly cost a fair amount in interest. It wouldn't be a bad idea to pay it off in your position, but that does make a raft or assumptions that may or may not be true about your future.

Personally, I would keep the funds and concentrate on your immediate goals of buying a property. You are clearly financially savvy to have saved as much as you have and will hopefully go on earning more. There will be plenty of time to clear it earlier after you have hit some key milestones.

That way you can keep your investments, have an emergency fund and pay for a deposit on a property. Depending on where you buy it will probably rely on having most of it and more!

ajs117

Thanks for your advice @DrEskimo, much appreciated. 

Giddypip

ajs117 said:

As of today 17/12/2020, my student loan plan 2 balance is £57,376.20, eye-watering I know. I am 27 years old and I am classed as a high earner (£50k p.a. total inc bonus) and this is likely as I get more senior in my position, meaning I will be paying the 5.6% interest rate. I currently have capital in investments but also £50k in Premium Bonds which are only getting 1% at the moment. I do plan to buy a property in the near future, have funds in the Premium Bonds is not essential/earmarked for that. Would it be wise for me to pay off the balance or a chunk of it as it is charging more interest than I am making from the Premium Bonds or should I keep it?

ajs117 said:

Giddypip said:

You don't earn any interest on premium bonds, the 1% is the prize fund.

I didn’t say it was earning interest...

see bold

ajs117

Giddypip said:

ajs117 said:

As of today 17/12/2020, my student loan plan 2 balance is £57,376.20, eye-watering I know. I am 27 years old and I am classed as a high earner (£50k p.a. total inc bonus) and this is likely as I get more senior in my position, meaning I will be paying the 5.6% interest rate. I currently have capital in investments but also £50k in Premium Bonds which are only getting 1% at the moment. I do plan to buy a property in the near future, have funds in the Premium Bonds is not essential/earmarked for that. Would it be wise for me to pay off the balance or a chunk of it as it is charging more interest than I am making from the Premium Bonds or should I keep it?

ajs117 said:

Giddypip said:

You don't earn any interest on premium bonds, the 1% is the prize fund.

I didn’t say it was earning interest...

see bold

Yes I see the bold, but you are still incorrect... Does it say interest anywhere in your quote? Getting 1% as in currently been given 1% of what the bond investment is (in prizes obviously). 

ajs117

I will add to that the returns are approximately 1% p.a. before any more hairs are split.

pphillips

Have you thought about opening a LISA?

inspectorperez

My comments for what they are worth, having two "high earner" sons both previously with significant Plan 2 Student Loan balances, may be contrary in some ways to the orthodox views which are expressed by experts like Martin Lewis.

Even though my kids were reasonably relaxed about such loans, I insisted that they allow my wife and I to pay them off by capital instalments from our own excess capital. Reasons behind this were

1. I found the SLC an absolutely awful organisation to deal with even though there were written authorities in place to allow me to act as "agent". Communications were poor in quality and response times and the financial information shown on line was never completely transparent in terms of interest
2. The rate of interest geared to RPI/CI (can't remember which) plus 3? extra points was in my view excessive
3. Possible difficulties in obtaining mortgage lending for property purchase
4. Risk of tranches of student debt being sold off to unscrupulous companies for the purposes of raising finance for the Treasury
5. Some "horror" stories reported of difficulties in having overpayments returned at end of term of loan
6. Poor communication between SLC and HMRC causing confusion for employer and employee
   
7. Potential issues if you take up employment abroad

As I say, observations from a parent's perspective.

Will you get a win of substance from your premium Bonds - anyone's guess?

ajs117

pphillips said:

Have you thought about opening a LISA?

I do have a Help to Buy ISA which in a few months will hit the £12k threshold for maximum government payoff. Unfortunately, I don't think I will be getting the government bonus as I am looking at properties above the £250k outside of London threshold. I did consider opening a LISA but when I finally found out about them it wouldn't be worth it as it doesn't pay off a bonus if you have it for less than 12 months and I will be buying a property within the 12 months all being well.