Student Loans & Intrest Payments

*APPLICABLE TO PEOPLE WHO DO NOT SPEND THIER LOAN*

Right,

For months now i have been reading about how we should all be taking out the maximum student loan and putting it all away in an isa and when the time comes to pay it back to do it in one go and pocket the intrest. Ever the suspicious mathematician i decided to do the calculations myself.

In 2004/5 the maximum unassesed loan one could recieve was £3070.00 with the first payment in early october of £1013.10 we were already building up the intrest payment for that month of £1.28 (this is for 18 days for me!). Next month the intrest was £2.14 plus the £1.28 from last month, gives £3.42. Carrying this on we get intrest payments for 1st year totalling £58.71. (APR of loan is 2.6%)


Clearly after the first year the intrest earned on an ISA paying 4.8%, say would easily cover the loan intrest, in fact the interest on a loan paid into an ISA in three in stallments (with the final £70 going into an account playing 4.8% also, say) would be £106.51)

The story looks good so far...

In 2005/6 the maximum unassesed loan was £3145.00, with intrest popping up all over the place. By xmas, for example the total amount owed is £4198.69 with intrest for the month of December totalling £11.22

Intrest payments upto the end of second year now total £232.69 (APR = 3.2% this year)

Investing in the same ISA, dripping in £1000+ every 3 months would pay £324.07 on the total balance of £6000+

Again looks like the ISA covers the loan...

Now it gets a bit more complicated and future intrest payments are projected by me and not officially set in stone

In 2006/7 the maximum unassesed loan (if like me it will be your final year) will be £3303.75 which gives approximate total loan payments (based on an expected APR of 3.8%) of £628.92 for the whole of a 3 year degree

The ISA will yield £751.56 over the course of 3 years

Giving a profit of £122.64

So it seems that the 'ISA method' of saving the student loan is mathematically the way to do it (as long as your ISA pays over about 4.5ish%, however its clear that to keep this profit the loan will have to be paid off on graduation else subsequent intrest payments will eat into the profit since the APR will go up year on year eventually overtaking the ISA rate.

The studnet loan company however doesnt expect you to begin repayments until 1 year after the final loan payment is presented to you in Apr of graduation year, thus racking up another £400+ in intrest payments.

So i think it is worth considering very carefully whether a £10000+ debt is worth £120 to you or not, even if you can pay it off in one go.

jr

( :p NB - I reserve the right to have made small errors in my calculations :p )
Come to my garden in South Bucks and i'll find you a wasp...
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Replies

  • am i the only 1 who cant afford to put there student loan away! i need to to get to uni, price of petrol today!!!!
  • arumiatarumiat Forumite
    64 Posts
    jr666 this is very interesting and extremely worrying. I am stoozing my entire loan for hopefully what will be 5 years, and was under the impression that as the loan was only going to go up by inflation I was onto a sure winner having it in a 4.5% to 5% account (inflation is closer to 2% no?) This means per year you would be in the green by just over 2%, provided that you compound the interest that you make from the loan. I could see the case if you were NOT to compound the interest but as long as you dont touch your interest payments, it should still (all things going well with the markets) grow above inflation and give you a profit?

    Be interested to hear more and once my exams are over next week I might just do a bit of maths myself!! I would feel like (and in fact be) a massive duffus if all this loan stoozing effort is going to end up costing me money. Some MSE eh haha.

    Cheers
  • jr666jr666 Forumite
    247 Posts
    hi,

    as far as my calc's show i think its ok to use the 'ISA method' (patent pending on that name ;)) to stooze the loan as long as on graduation (or within the 1st year of grad) its paid off in full, otherwise if the loan is left to accrue intrest in an ISA then there will come a point where the loan APR will rise above the rate offered by an ISA and start eating into the profit.

    In 2004/5 the APR was 2.6%
    In 2005/6 it was 3.2%
    so i guess in 06/07 it will be 3.8% (which is how i calculated my approximated intrest payments above)
    ...and then 4.4%?? and then we get into dangerous water as if the BoE cuts intrest rates then we are talking about a profit reduced to £10's of pounds rather than £100's and i for one am not very interested in the effort involved in the loan for the sake of £50. There are better ways to make money.

    This is all assuming the loan isn't used at all...

    I think the "well this loan is virtually intrest free" brigade need to sit down an do a few sums before taking out a needless loan.


    clearly it will go up year on year
    Come to my garden in South Bucks and i'll find you a wasp...
  • SillychuckieSillychuckie Forumite
    1.2K Posts
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    Surely as the amount in the loan account goes up (as interest is added) and you have to pay more, the balance in your savings account also goes up.
    Provided the rate is higher in the savings account, the savings will always increase more than the amount you have to pay, and you'll always be in the black.

    Maybe I'm missing something, but I don't see what.
    If you take the max loan out, put it in a savings account, never touch the money and always compound the interest, I don't see how you would ever suddenly be paying more money on your loan repayments than you are getting from the savings account.

    As you earn and repay the loan, the margin on the savings vs loan repayments increases even further.

    I have not seen it written anywhere that the APR on your loan is increased yearly and as long as it is less than that being earned on your savings account, it seems like a good deal to me.
    The government wont increase it by ridiculous amounts either or people simply wont bother taking them and they'll fall short of their uni targets.

    Please clarify if you think that loan APR is guaranteed to increase to a rate above and beyond the average savings rates. I am not convinced it will, but will be keeping my eye on it.
    So long as loan repayment APR < savings account APR, I'll be keeping the money.
    Thanks.
  • jr666jr666 Forumite
    247 Posts
    depends whether you want the effort of paying back a 10K loan (plus intrest) over say 10-15 years for the sake of £100?? I don't.
    Come to my garden in South Bucks and i'll find you a wasp...
  • surfcatsurfcat Forumite
    734 Posts
    jr666 wrote:
    In 2004/5 the APR was 2.6%
    In 2005/6 it was 3.2%
    so i guess in 06/07 it will be 3.8% (which is how i calculated my approximated intrest payments above)
    ...and then 4.4%??

    .....

    I think the "well this loan is virtually intrest free" brigade need to sit down an do a few sums before taking out a needless loan.


    clearly it will go up year on year

    Where do you get this sh!te from? Why not read the information clearly provided on the SLC website. The interest rate is based on the March to March percentage increase in the retail prices index, and applies the year beginning in the following September.

    Look at http://www.incomesdata.co.uk/statistics/rpitable.htm

    From March 2003-2004 RPI increased by 2.6%, hence 2.6% interest from Sept 2004.
    From March 2004-2005 RPI increased by 3.2% hence 3.2% interest from Sept 2005
    From March 2005-2006 RPI increased by 2.4%, hence.........no, not 3.8% which represented a bizarre linear increase in rates based on a trend sample of 2 (I hope to god you didn't do a degree involving maths).

    So no the interest rate will not clearly go up year on year.
  • surfcatsurfcat Forumite
    734 Posts
    Also see http://www.slc.co.uk/noframe/corpinfo/factfig.html

    There's a table on their with historical student loan interest rates on.

    In 1998/99 for example, 3.5%, whereas it fell to 2.1% in 1999/2000.

    but "clearly it will go up year on year"
  • SillychuckieSillychuckie Forumite
    1.2K Posts
    Part of the Furniture 1,000 Posts Combo Breaker
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    As Surfcat has pointed out, the figures jr666 is plucking from the air is pure speculation and in my opinion, utter rubbish.
    The money you make over the course of the 10 year repayment will be far greater than £100.
    I'll have to do some maths calcs later based on the real figures.
  • jr666jr666 Forumite
    247 Posts
    I didnt realise that was how they worked it out. I'm sorry. You didnt need to be so rude to me though. I was only trying to see whether it was genuinely worth taking a huge needless loan to make intrest on it or whether it'd be better to live an easier life not having to worry about debts like studnet loan.

    I think before you all start shouting at me you should take 1/2 and hour to read the 'debt free wannabe' board and see how peoples lives have been ruined by taking needless debts (loans, store cards etc) and how people regret taking these things. I was only trying to help. I hope none of you find yourself asking for help on that board one day. If you do, don't say i didnt warn you.
    Come to my garden in South Bucks and i'll find you a wasp...
  • jr666jr666 Forumite
    247 Posts
    surfcat wrote:
    I hope to god you didn't do a degree involving maths

    Why not?? I've calculated the payments accuratly with the data i've used?? Can't do much more than that.

    As a matter of fact i do do maths at uni. Perhaps you could give me some lessons, i'm having trouble with the finer points of the Riemann/Lebesgue Integrability critereon's. As a matter of fact i dont think ive seen a 'number' for about two weeks.
    Come to my garden in South Bucks and i'll find you a wasp...
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