Student loan

slhqoue

I have £3,355 left on my Plan 1 loan and £12,263 left on my Plan 2 loan.

The government website claims both loans are at an interest rate of 3.2%, although this seems strange to me as it also states that interest for Plan 2 loans is "3.2%, plus up to 3%" for my pay band (however it does not state what this 'plus up to 3%' is dependent on.

I have a cash ISA, a stocks and share ISA and a savings account with money that could be spent on clearing all my loans.

I guess my question is what factors would you consider in deciding whether to clear the debt?

slhqoue

I am not a higher earner, currently earn around £44k. I'm torn as I see the advantage of clearing the 'debt' and gaining approx. £130 a month net pay due to not having the repayments. Yet as many MSE pages suggest, it might be better for me to just accept this debt ...

WillPS

slhqoue said:

I am not a higher earner, currently earn around £44k. I'm torn as I see the advantage of clearing the 'debt' and gaining approx. £130 a month net pay due to not having the repayments. Yet as many MSE pages suggest, it might be better for me to just accept this debt ...

If you can afford to pay it off, I'd strongly consider instead saving whatever the deposit would be, enjoy the benefits of the interest and take a little comfort knowing you have the money if harder times are hit.

This has been the approach I took a few years back with a balance similar to yours, the money was instead used as a seed fund for a load of regular savers - the blended rate earned has hovered between 5 and 6.5% for me in that time; always comfortably ahead of the interest I've been charged on my student loan.

My loan will clear naturally sometime this summer, and I'm looking forward to being able to fund another regular saver or two out of the extra funds each month.

slhqoue

WillPS said:

slhqoue said:

I am not a higher earner, currently earn around £44k. I'm torn as I see the advantage of clearing the 'debt' and gaining approx. £130 a month net pay due to not having the repayments. Yet as many MSE pages suggest, it might be better for me to just accept this debt ...

If you can afford to pay it off, I'd strongly consider instead saving whatever the deposit would be, enjoy the benefits of the interest and take a little comfort knowing you have the money if harder times are hit.

This has been the approach I took a few years back with a balance similar to yours, the money was instead used as a seed fund for a load of regular savers - the blended rate earned has hovered between 5 and 6.5% for me in that time; always comfortably ahead of the interest I've been charged on my student loan.

My loan will clear naturally sometime this summer, and I'm looking forward to being able to fund another regular saver or two out of the extra funds each month.

Thanks Will. I'm interested when you say 'a load of regular savers' - what do you mean by this? I have a First Direct regular saver, saving £300/month at 7%. I also have the Cash ISA which is definitely earning less - around 3.86%. Then I have the Stocks and Shares ISA where the entire balance is invested in two ETFs - which are up 10.78% since July! Though this obviously has the risk that they'll go down in the future.

QrizB

slhqoue said:

I am not a higher earner, currently earn around £44k. I'm torn as I see the advantage of clearing the 'debt' and gaining approx. £130 a month net pay due to not having the repayments. Yet as many MSE pages suggest, it might be better for me to just accept this debt ...

Per MSE's loan calculator tool a £130pm payment will clear a £15500 loan in 15 years.

How long until your student loans are written off?

slhqoue

QrizB said:

slhqoue said:

I am not a higher earner, currently earn around £44k. I'm torn as I see the advantage of clearing the 'debt' and gaining approx. £130 a month net pay due to not having the repayments. Yet as many MSE pages suggest, it might be better for me to just accept this debt ...

Per MSE's loan calculator tool a £130pm payment will clear a £15500 loan in 15 years.

How long until your student loans are written off?

So is this certain even with the Plan 1 and Plan 2 loans having separate interest, that if I'm paying approximately £130 a month from my salary I'll pay off both loans in 15 years?

I am 42 - so quite a while until they get written off.

Is there any easy way of calculating how much I would save by paying off the loans now in one go? I assume it's around £10k. However I guess the real question is the opportunity cost of not sticking that £15,000, say, into an ETF or similar ...

QrizB

slhqoue said:

Is there any easy way of calculating how much I would save by paying off the loans now in one go?

From the same loan calculator, £15500 at 6% over 15 years costs £130 a month and repayments total £23543. That's £8043 in interest.

slhqoue said:

However I guess the real question is the opportunity cost of not sticking that £15,000, say, into an ETF or similar ...

What return do you expect to get on your ETF, that's the fifteen-thousand-dollar(well, pound) question?

If more than 6%, stick with the student loan. If less, pay it off.
Plus there's the certainty that the loan interest rate won't be 6% forever.

(I've only guessed you're paying 6%, since we think it'll be more than 3.2% but less than 6.2%.)

slhqoue

QrizB said:

slhqoue said:

Is there any easy way of calculating how much I would save by paying off the loans now in one go?

From the same loan calculator, £15500 at 6% over 15 years costs £130 a month and repayments total £23543. That's £8043 in interest.

slhqoue said:

However I guess the real question is the opportunity cost of not sticking that £15,000, say, into an ETF or similar ...

What return do you expect to get on your ETF, that's the fifteen-thousand-dollar(well, pound) question?

If more than 6%, stick with the student loan. If less, pay it off.
Plus there's the certainty that the loan interest rate won't be 6% forever.

(I've only guessed you're paying 6%, since we think it'll be more than 3.2% but less than 6.2%.)

Thanks, that's really helpful. As I'd hope to get more than 6% from the ETF over the long run I guess it's better to stick with the loan.

Just playing devil's advocate, isn't there the chance the interest on the student loan could be even worse in the future? 

QrizB

slhqoue said:

Just playing devil's advocate, isn't there the chance the interest on the student loan could be even worse in the future? 

Inflation (which is what your interest rates are tracking) goes up and down but has typically been 3-4% since the 1990s.
https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23

WillPS

slhqoue said:

WillPS said:

slhqoue said:

I am not a higher earner, currently earn around £44k. I'm torn as I see the advantage of clearing the 'debt' and gaining approx. £130 a month net pay due to not having the repayments. Yet as many MSE pages suggest, it might be better for me to just accept this debt ...

If you can afford to pay it off, I'd strongly consider instead saving whatever the deposit would be, enjoy the benefits of the interest and take a little comfort knowing you have the money if harder times are hit.

This has been the approach I took a few years back with a balance similar to yours, the money was instead used as a seed fund for a load of regular savers - the blended rate earned has hovered between 5 and 6.5% for me in that time; always comfortably ahead of the interest I've been charged on my student loan.

My loan will clear naturally sometime this summer, and I'm looking forward to being able to fund another regular saver or two out of the extra funds each month.

Thanks Will. I'm interested when you say 'a load of regular savers' - what do you mean by this? I have a First Direct regular saver, saving £300/month at 7%. I also have the Cash ISA which is definitely earning less - around 3.86%. Then I have the Stocks and Shares ISA where the entire balance is invested in two ETFs - which are up 10.78% since July! Though this obviously has the risk that they'll go down in the future.

Yes, just that. My wife and I have that 7% account (it's a very good one), but we also have 45 other regular savings accounts, with interest rates varying between 5.25% and 8%. The blended interest rate across all our regular savers currently stands at 6.8% for us, but that's distorted considerably by two accounts which have high rates, are maximally funded and just awaiting maturity, and a ridiculously generous offer from Monmouthshire BS (unfortunately NLA now).

It's a whole hobby keeping on top of all these accounts and grabbing them when they're available, but if you enjoy squeezing every penny from your savings it's wicked fun.

slhqoue

Plan 1 is from a three year degree 2003-2006. Plan 2 is from a postgraduate PGDipEd 2015-2016.