Should I make a lump sum repayment on my Plan 2 student loan as a new graduate?

whiteandredflowers12

Hi all,

I'm about to qualify as a dentist and will be on Plan 2 for student loans. My current financial situation:

• Student loan balance: around £90,000

• Savings: about £40,000 (currently just in a 4.3% cash ISA)

• Starting salary: approx. £50,000 then jumps to £70,000 in the second year of qualifying

I understand that Plan 2 loans accrue interest at up to RPI + 3% (so potentially around 7%), and the loan is written off after 30 years. Given my expected income, I may end up repaying the full balance over time — so I’m wondering:

• Is it worth making a large lump sum repayment now (e.g. £20k) to reduce interest buildup?
  

• Or should I leave the savings intact and just make the regular monthly repayments?

I’m also thinking about doing a second lump sum repayment in a few years if it makes financial sense.

Any advice appreciated

Thanks in advance!

badmemory

I think there is a better place for this but I will jump in anyway.  With more questions than answers.

I can see the logic as you will be paying more interest on the loan than you are getting on your savings.  But - there always is a but - what about the roof over your head, do you own it or are you paying rent.  How much would owning one cost compared with paying rent.  If you own your own home it may be possible to go part time for some years if you need to, is that a possibilty.

Now you know what I mean about more questions than answers

silvercar

@whiteandredflowers12 welcome to the MSE forum.

I’ll move this to the student board.

th081

It appears the Plan 2 rate is 7.3% if you have a salary of over 51k so you will be paying 7.3 soon if not from day 1. 

At 7.3% interest will add on by £6500 each year and assuming a salary of 70k you will be paying 3700 each year and not keeping up with the interest. Your salary will no doubt increase after year 2 and you will at some stage pay more than the interest and likely pay it all off. If/when you get to 120k you will be paying 8100 per year to the loan.

For me, given you are a high earner, it makes sense to pay a lump sum to reduce the amount you owe and hence interest. 

silvercar

I don’t know exactly how dentist careers unfold, but do you need to keep some money by to buy into a practice at some point?