Is Martin Lewis still correct with not repaying student loans early in this situation?

zzzt

I have a plan 1 loan that was quite big.

Martin's advice has always been to not repay them because it's not like other debt, has "no real cost of borrowing", and gets written off eventually etc.

The main point he makes is that there are better uses for your money, such as paying off other debts with higher interest rates or which have more serious consequences for not repaying, or that you can earn more interest in savings accounts than the interest rate on the student loan. And also that the interest you are paying only makes the debt worth the equivalent due to inflation, it hasn't increased in real terms.

That was true for a long time but for the last couple of years it doesn't seem like it has been? The interest rate is 6.25%, higher than inflation or what you can get in savings accounts.

Let's assume I have no other debts (besides a fixed 2% mortgage). I have 20k student loan left and based on my current salary and a loan interest rate of 6.25% I will repay the loan in 14 years, but it will get written off in 13 years (25 years after graduation).

I'm struggling to comprehend what's best to do because there are so many assumptions there. It's unlikely that my salary will be the same for the next 13 years, it will probably increase. That alone means I probably will actually repay it before it's written off. Secondly, it's unlikely that the interest rate on the loan will be 6.25% for the next 13 years. Both inflation and interest rates will fall in the next year, so I'll end up paying it off faster.

But right now, I'm paying this 6.25% interest rate on quite a large loan, and it makes me uncomfortable. If I had ignored Martin Lewis's advice and paid some of the loan off earlier, then it would be substantially lower now, and I would be on track to pay it off, and these current high interest rates would apply to a smaller loan, so the 9% taken from my salary would outweigh the interest more.

The only reason my student loan got so big is because the interest kept compounding on it when my salary was lower and the repayments were lower than the interest. If I had used some of my savings early on to bring the capital down then my repayments from my salary would have actually been making a dent in it for all the years I've been working, and I would have been closer to paying it off now.

Now that my salary is high enough that it's becoming likely I might pay it off, I'm regretting having let it grow all that time. Is it worth making some overpayments now, to bring down the capital? The interest rate on the loan is higher than what I'm getting in savings accounts, but who knows if that will be true in a year.

If I assume my salary grows by 2% per year and interest rates go down to 3.4% then I will pay it off in in about 8 years. So does it make sense to repay it off faster?

Ed-1

zzzt said:

I'm struggling to comprehend what's best to do because there are so many assumptions there. It's unlikely that my salary will be the same for the next 13 years, it will probably increase. That alone means I probably will actually repay it before it's written off. Secondly, it's unlikely that the interest rate on the loan will be 6.25% for the next 13 years. Both inflation and interest rates will fall in the next year, so I'll end up paying it off faster.

There's a big increase to the Plan 1 repayment threshold coming into effect on 6th April. The threshold will rise from £22,015 to £24,990 in line with the March 2023 RPI of 13.5%. This will reduce repayment by around £268 a year. The threshold will then increase by around 4% to around £26,000 in April 2025 in line with this month's RPI knocking a further £90 a year off repayments. Factor those reductions in repayments into your calculations. Nothwithstanding increases to your salary, you'll be paying the loan more slowly due to the high inflation feeding through into a higher repayment threshold.

silvercar

You are in crystal ball territory with all your “if”s. Who could have foreseen the changes in interest rates? Or known your salary trajectory?

Now you are in crystal ball territory looking forward. Consider what interest rates are likely to do, what your salary will change to and whether you could better utilise the money for something else eg a pension.

zzzt

Ed-1 said:

There's a big increase to the Plan 1 repayment threshold coming into effect on 6th April. The threshold will rise from £22,015 to £24,990 in line with the March 2023 RPI of 13.5%. This will reduce repayment by around £268 a year. The threshold will then increase by around 4% to around £26,000 in April 2025 in line with this month's RPI knocking a further £90 a year off repayments. Factor those reductions in repayments into your calculations. Nothwithstanding increases to your salary, you'll be paying the loan more slowly due to the high inflation feeding through into a higher repayment threshold.

Very interesting, thanks. I didn't know that.