Pay Student Loan or Save for Mortgage?

BD1871

Hi.

I'm in a fortunate position where my grandmother has offered to pay off my student loan (+- £70k). She insists this is the best use of the money and is not keen on me investing it for a few years, then using more savings to pull together a bigger deposit for a house. I currently don't earn enough to get a mortgage on a house in the area I'd like to live in using £70k as a deposit. Should I just accept the money (she is very stubborn and is insisting its for the loan and nothing else) and pay off my loan, or am I better trying to convince her to let me save it for a future deposit. I'm not sure personally which is the better financial decision. I appreciate this is a nice problem to have, FYI! 

steve866

This probably depends on the interest rate on your loans, expected earnings and other factors. I would personally be lobbying to use it for house deposit without knowing more as it will be hard to get that deposit again!

steampowered

If you have a modern student loan, it is almost always an awful idea to pay it off early. There is a very good MSE article which explains this: https://www.moneysavingexpert.com/students/student-loans-repay/

In short, most recent graduates will never need to repay their student loan in full. Modern student loans are treated like income tax which your employer takes off your income, and are wiped after 30 years. So, for most, repaying student loans early is really just throwing money in the bin. There is a reason why MSE is campaigning to have student loans renamed as a "graduate contribution" rather than as a "loan".

There is no situation in which you are better off paying the student loan instead of using it as a house deposit. Money on a mortgage is money which you have to pay back, and must pay back even if you fall on hard times. Money on a student loan is money which you will probably never have to pay back in full, and will not pay back at all if you fall on hard times. 

Your grandmother probably just heard the word "loan" and doesn't understand how student loans work. 

lookstraightahead

Agree with Steve866. Perhaps your lovely grandmother worries about the debt which is understandable, but have you explained that you only pay it back when you earn over a certain amount? My daughter has about the same amount of debt and she's not paying that much per month. Try to explain that it's like a tax.

Having said that, maybe she doesn't see house ownership as that important at a young age (which I also agree with) and she thinks you won't make much interest, or that you will fritter it away. Maybe she's so proud of you that she wants to pay for your education.

Difficult one - could you come to a compromise? Put some away and show her that your earnings will cover the rest over time ? 

goodwithsaving

Do you earn enough to be paying the loan back? I paid mine off early, because it was costing me a significant amount each month (but I already owned a house and it was £10,000 left on the balance, rather than £70,000). If you are, and you are in an employment area which is relatively stable, then I would probably consider it. 
Equally, I think it's better used towards a house deposit. 
If it's pay off the loan or don't receive the money at all, then obviously I would accept her generous offer.

lookstraightahead

steampowered said:

If you have a modern student loan, it is almost always an awful idea to pay it off early. There is a very good MSE article which explains this: https://www.moneysavingexpert.com/students/student-loans-repay/

In short, most recent graduates will never need to repay their student loan in full. Modern student loans are treated like income tax which your employer takes off your income, and are wiped after 30 years. So, for most, repaying student loans early is really just throwing money in the bin. There is a reason why MSE is campaigning to have student loans renamed as a "graduate contribution" rather than as a "loan".

There is no situation in which you are better off paying the student loan instead of using it as a house deposit. Money on a mortgage is money which you have to pay back, and must pay back even if you fall on hard times. Money on a student loan is money which you will probably never have to pay back in full, and will not pay back at all if you fall on hard times. 

Your grandmother probably just heard the word "loan" and doesn't understand how student loans work. 

Excellent post. It's not just grandparents who don't understand this concept, I wish more people did.

kingstreet

What steampowered said. My 19 y/o at MMU is viewing this exactly the same way. 9% graduate tax on her excess earnings once she is working and earning above the threshold. I would expect the FOS to upload a complaint if a broker ever advised repaying a student loan ahead of other more important issues.

Owleyes00

Agree with pp, very little point in paying off your student loan early. A significant proportion of people will never have to pay it off in full and it is not debt in the same way as other loans are I.e. if you can’t afford to pay it back you don’t and the amount you pay back is proportionate to income.

For context, I have two student loans. One on plan 1 (pre 2012) and one on plan 2 (post 2012) for a postgrad qualification. I owe about £35,000. I currently make just under £45,000 a year and repay £183/month on my student loan. If you were able to instead save that £183/month because you had paid off your student loan, you would save an extra £2,196/year. Not a bad amount of money but it would take you 31 years to save back the £70k you are being offered! I presume you would like to have bought a house by then?

fewcloudy

BD1871 said:

Hi.

I'm in a fortunate position where my grandmother has offered to pay off my student loan (+- £70k). She insists this is the best use of the money and is not keen on me investing it for a few years, then using more savings to pull together a bigger deposit for a house. I currently don't earn enough to get a mortgage on a house in the area I'd like to live in using £70k as a deposit. Should I just accept the money (she is very stubborn and is insisting its for the loan and nothing else) and pay off my loan, or am I better trying to convince her to let me save it for a future deposit. I'm not sure personally which is the better financial decision. I appreciate this is a nice problem to have, FYI! 

@BD1871

As others have said, do NOT use it to pay off the student loan.
Almost any other financial product will make more sense, esp a house deposit. That will (potentially) reduce the amount you need to borrow, saving a lot of money in interest over the years.
All other types of debt too should be dealt with before even thinking of paying a penny more than you HAVE to odd your student loan. Then pensions and God knows what else...

Grandmother is likely of a generation where she is focused on the word LOAN. i.e a debt. Understandably wants to help you get rid of that burden.
Whereas we know it's a loan sure, but like no other. More like a tax for the vast majority of students and ex-students who have one.

hazyjo

Bet you won't change her mind. My mum is exactly the same. She's done similar things and there's no way she'd be convinced otherwise. Debt is debt and she'll want it cleared if she's giving you the money. She wouldn't be giving it to you if it wasn't for the loan so I don't really think it's wise to be convincing her to let you spend it elsewhere.

I know how you and everyone else are thinking and know that makes absolute sense, but I would just say thanks, pay off the loan, and start from scratch.

Good luck with whatever you do.

BD1871

Thanks everyone. I will work on trying to get her to see the light...!