Would you pay off your student loan if you were in my position?

BigFish170

I am fortunate enough to have parents who have had a bit of a windfall recently and have offered to use some of it to help me out financially with something. They asked me what I would benefit from the most - I already have a house and am not planning to get married anytime soon, so the first thing that came to my mind was to clear my student debt. I have already done my research on this and am aware of the advice that is out there, but I am interested to hear what others would do in the same situation…. 

• Plan 2 Student Loan
• Original loan value circa £40k 
• Current debt of £45k
• Gross salary circa £75k
• Current repayments circa £275pm 
• Graduated 2015 (10 years down, 20 years till the debt wipes)
• Worked out I have probably repaid circa £15-£20k over the last 10 years as I’ve been consistently earning between £30-£60k since graduating. 
• If my salary stays the same then over the next 20 years I will pay a further £66k based on current repayments
• I expect to have another couple of promotions within the next 20 years plus annual inflationary pay rises, so the future repayments are likely to actually be quite a lot more than £66k (especially if the gov keep freezing the repayment threshold) 
• Based on MSE’s advice and calculator, I think I am in the category of people where I earn enough that I will end up paying significantly more than I originally borrowed over the 30 years and therefore paying it off early might actually make sense in my case. 

I’m aware that a lot of the advice out there is that graduates should not worry about paying off the loan and just treat is as a tax, but my reasoning for leaning towards asking my parents to pay it off for me is:

• Short term - Extra take home pay of £275pm straight away (increasing further as my salary increases). I’m pretty sensible with money so would probably divert most of this into savings / investments. 
• Longer term - Saving of at least £21k (likely more than this) based on forecast repayments of at least £66k over the next 20 years compared to £45k lump sum payment 
• I can’t really think of anything else that I need financial help with in the near future. I guess I could ask my parents to just give me £45k cash instead (although not sure if they would agree to this) so that I can earn interest on it until such time that I want to get married or move house, but I already have my own savings so this option doesn’t feel like it would make anywhere near as much difference to me financially as clearing the debt and getting 9% of my salary back in my pocket. 
• The only real disadvantage I can think of with paying off the debt is that if I were to stop being able to work for any reason within the next 10-15 years, the repayments would stop and therefore I would have been better off keeping the cash. At the moment I don’t foresee this happening but I’m aware that it is a consideration. 

Like I said, I’m already aware of the MSE guidance so not necessarily looking for advice that I can already find online - I’m just interested to see what others would do in the same situation and whether or not you agree with my reasoning / calculations. Also if there is anything I should be aware of in terms of paying it off that I might not have thought about already then please let me know. 

Thanks! 

silvercar

The most obvious use of the money would be towards a pension, where you would expect the growth to be on average higher than the interest you are paying on the loan.

That aside, you need to use an online calculator and work out total repayment and interest charged based on your forecast of future pay. All the history you have posted is now irrelevant. Pertinent facts are you have an outstanding loan of £45k and are likely to repay £66k on current salary levels and £XXk if you have the increases you are expecting. So work out the interest rate on that and compare it to what you could get by investing £45k in a pension, or in general and go from there. 

QrizB

You're paying £3300 a year towards a loan of £45k. If your interest rate is 7.3%, almost all of your payment will be used to service interest and your balance won't fall significantly.

If RPI falls then you'll start reducing the principal of the loan; if it rises, you'll quickly hit the 8% cap so your principal is unlikely to increase by much.

Note also that the way RPI is calculated will be changing shortly; it'll be set as identical to CPIH, which (historically at least) has been somewhat (about 1%) lower than RPI.

(Chart from from https://actuaries.blog.gov.uk/2021/08/23/measures-of-price-inflation-rpi-cpi-and-cpih/ which includes some discussion of the RPI-to-CPIH change.)

So your future interest rate on the loan is likely to be lower than it would otherwise be.