Pay off interest on student loan?

Ray_Singh-Blue

Hi

Say someone has 2 children at university. They are not in a position to pay their tuition fees in full. However, they could pay the annual interest to stop it compounding, and make it easier for the students to pay off their loans later.

Is this worth considering? Especially as inflation appears to be rising.

Thanks

Ed-1

Ray_Singh-Blue said:

Hi

Say someone has 2 children at university. They are not in a position to pay their tuition fees in full. However, they could pay the annual interest to stop it compounding, and make it easier for the students to pay off their loans later.

Is this worth considering? Especially as inflation appears to be rising.

Thanks

The government cancels the full loan balance including interest after a certain time period (currently 30 years for post-2012 student loans). So unless they'd earn £50k+ for 30 years and therefore pay off the interest, it's throwing money down the drain.

silvercar

It really isn't worth doing this. It won't alter the student's repayments until they reach a point where the outstanding amount is only what the interest charged is and all the original capital amount is cleared. For the majority of students, their earnings won't reach this point, so it is literally giving money to the government for no return.

Ray_Singh-Blue

Thanks for the comments

Personally I no longer look at my finances through a cashflow lens, but rather focus on growing assets and using leverage carefully to do that. These 6%+ loans feel like the opposite of that approach.

It sits badly with me, having managed debt carefully, to see them graduate a 4 year MSc with £60K of debt compounding at 6% per year. I don't like it, but I guess this is my problem to deal with. 

It is true that whether I pay the interest or not, their repayments in the first years of their careers will be exactly the same. The only difference will be how many years they make repayments for. Into their 30s, into their 40s...  

silvercar

Ray_Singh-Blue said:

Thanks for the comments

Personally I no longer look at my finances through a cashflow lens, but rather focus on growing assets and using leverage carefully to do that. These 6%+ loans feel like the opposite of that approach.

It sits badly with me, having managed debt carefully, to see them graduate a 4 year MSc with £60K of debt compounding at 6% per year. I don't like it, but I guess this is my problem to deal with. 

It is true that whether I pay the interest or not, their repayments in the first years of their careers will be exactly the same. The only difference will be how many years they make repayments for. Into their 30s, into their 40s...  

Agreed. Though I would add that it is worth making an assessment on whether they are embarking on a career that is financially rewarding enough that they will not have a chunk of the loan written off at the end of its term. If they are choosing a career path that doesn’t pay particularly highly or plan to work part time or not at all for long periods, it could be better putting that 60k in an account and for them to use that to make the monthly repayments - there may turn out to be a lump sum left at the end.

grumiofoundation

Ray_Singh-Blue said:

Thanks for the comments

Personally I no longer look at my finances through a cashflow lens, but rather focus on growing assets and using leverage carefully to do that. These 6%+ loans feel like the opposite of that approach.

It sits badly with me, having managed debt carefully, to see them graduate a 4 year MSc with £60K of debt compounding at 6% per year. I don't like it, but I guess this is my problem to deal with. 

It is true that whether I pay the interest or not, their repayments in the first years of their careers will be exactly the same. The only difference will be how many years they make repayments for. Into their 30s, into their 40s...  

How will you feel it you pay off the interest and it turns out they never earn enough to have made this worth it before the loan is written off?