Pay off Student Loan & Use the Extra Money to Pay into an AVC?

diond

Hi, all.

I currently have £4k left on my student loan and pay approximately £128 a month at 6.25%.

I'm 52 and have always paid (20 years) into my Local Government pension, but am looking to start a salary sacrificed shared cost AVC to top this up. I can afford probably £300 a month, but would like to consider paying more in (obviously) but without compromising living the lifestyle I currently lead.

I have a mortgage of about £79k with nearly 15.5 years left to pay off. I have £30k in a basic current account, which was initially going to be used as a deposit to move, but I'm now thinking of staying put (there's nothing particularly wrong with the house) to pay the house off more quickly by making overpayments on my mortgage each month, which I'm (currently) lucky enough to do as well as pay into my AVC.

I've always read stories of people saying either don't pay off your student loan, or make it the last thing you should consider paying off, which I understand, but in my position now, do you think it's probably better to pay it off in full, and then use the extra £128 a month to put towards my AVC? Thanks.

masonic

A rate of 6.25% is not cheap - is it projected to drop significantly? You wouldn't achieve that in savings and could probably remortgage at a better rate than this. Paying it off now would make sense in my view, as it doesn't sound like any of it will be written off and it is your most expensive debt (presumably).

MX5huggy

No, don’t pay off the student loan increase your salary sacrifice to reduce your salary to avoid paying off the loan at all it will then be wiped in time. 

£1 in your AVC costs only 63p (20% tax 8 % NI 9% student loan) you then can get the whole lot back tax free (with in limits).

same with the mortgage just make the minimum payments and go hard at the AVC. Use the AVC lump sum to pay it off if you wish. 

A third of my salary goes to AVC, I’m paying £9 a month off student loan, looks like this years pay rise will be £1290 for all LG employees I’ll increase my AVC by £100 per month. I want to retire before the age my dad died (61). 

diond

Thanks for the replies. It's projected that I'll pay off the student loan in three years. My loan rule was that it was either written off after 25 years, or when I hit 65.

I'm just thinking that in those three years, I may go a long way (potentially) in making back the £4k I use to pay off my student loan?

masonic

diond said:

Thanks for the replies. It's projected that I'll pay off the student loan in three years. My loan rule was that it was either written off after 25 years, or when I hit 65.

If you're 52 and the loan gets written off after 25 years, and if you believe it won't be written off in the next 3 years, then it suggests you completed your studies after the age of 30. Is that correct?

(Edit: Also, this site suggests the current rate - assuming you are Plan 1 - is 4.3%, not 6.25%)

If you can avoid paying off the loan in full, then that should be the priority, as that would make you the most money. The money saved not paying it off now can be used to fund your living costs, enabling you to buy more AVCs and get the best of both worlds.

If you had the option, would you use the £30k in your current account towards buying more AVCs?

masonic

Also, you say "My loan rule was that it was either written off after 25 years, or when I hit 65."

According to the gov.uk website, it is not either or. If you received your first loan after 1st September 2006, the 25 year rule applies, otherwise it doesn't and it will not be written off until you reach the age of 65. So you need to be clear whether or not it will be written off after 25 years.

diond

Thanks again, for the replies.

I got it wrong. My Student Loan is Plan 1, which means it gets written off when I'm 65, there's no 25 rule. I was 32 when I graduated. 

When I log into my account, it's still showing as 6.25% as the current interst rate, although it does say 'Your interest rate might not always be up to date. If your interest rate changes, we'll update it in the middle of the month', so I'm guessing it's only recently changed.

Regarding using my £30k to pump into my AVC, strangely that's something that I'd not even considered, so thank you for that. My focus was using it to overpay my mortgage and start a S&S ISA, so that's something else to confuse a person who finds it extremely difficult to make decsions!

mattojgb

The student loan plan 1 interest rate is set on 1 September each year to March RPI - unless at any time BBR +1% is lower. So it was at the latter rate until 1 September.

masonic

diond said:

Regarding using my £30k to pump into my AVC, strangely that's something that I'd not even considered, so thank you for that. My focus was using it to overpay my mortgage and start a S&S ISA, so that's something else to confuse a person who finds it extremely difficult to make decsions!

I don't know whether you can pump it into your AVC directly, but you could live off it while salary sacrificing more to build up you AVC while reducing your taxable income, as MX5huggy suggested. You can either pay off the student loan early or not, I'd lean towards paying it off but it is immaterial compared with the opportunity to build up your AVC pot indirectly from cash in the bank.

I would also second the suggestion to retain some emergency cash, so I wouldn't deplete the £30k completely.

housebuyer143

OP, you can make lump sum payments into APCs. How does that look if you do the calculations as a top up to your pension? 

mattojgb

If you started your LG pension before 2006, you may qualify to retire at 60 (rule of 85 (age + number of years service > 85).