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10,000s risk wasting money by choosing to repay their student loan when they don't have to

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10,000s risk wasting money by choosing to repay their student loan when they don't have to

edited 24 May 2019 at 4:13PM in Student Money Saving
6 replies 3.8K views
MSE_CallumMSE_Callum Forumite
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edited 24 May 2019 at 4:13PM in Student Money Saving
Tens of thousands of university leavers are risking wasting cash - in some cases over £20,000 - by voluntarily paying off their student loan even though they aren't earning enough to have to, MoneySavingExpert.com can reveal...
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'10,000s risk wasting money by choosing to repay their student loan when they don't have to'
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  • silvercarsilvercar Forumite, Board Guide
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    I agree with the sentiment of the article.

    I am curious on one point. "83% of students on plan 2 will not pay off the loan in full." Part of the reason for this is the high interest rate charged. I wonder what that percentage would be if interest from when the loan goes into repayment (the April after graduation usually) was excluded. After all, people repay early to avoid the interest accumulating on the loan.
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  • b.rokeb.roke Forumite
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    I make the same point as Silvercar. According to my sums, a £30K loan compounded monthly at 6.3% will be £198,000 in 30 years. Without paying anything off, by year 15 when our graduate may have had a promotion or two and want to buy a house/start a family, the loan will be growing at £5000/year. Even if he/she is then earning £80,000 a year and repaying perhaps £4000 - the loan will still be growing, and never be paid off in full
  • If these things were being hawked by private sector companies they would be in a mis-selling scandal all of their own. The very original student loans (1990-98) worked like actual bank loans which you repaid in set monthly installments over a set number of years, although even then you could "defer" each year if your income didn't meet the very generous threshold linked to average earnings. If you hadn't paid all the installments after 25 years the whole lot was cancelled.

    But all the confusion about the present system stems from the government's refusal to call them what they are - a capped graduate tax - and the opposition playing along with this for short term political advantage by constantly referring to "thousands of pounds of student debt".

    It would be far more honest (and far less off putting to potential students from poorer backgrounds) if the government simply said: "If you go to university you won't have to find a penny in fees, but once you start work, you will have to pay an extra income tax charge for thirty years on top of what people who didn't go to university have to. At the minute this extra is 9% on any earnings over £25,725 pa. Anytime your earnings are less than that £25,725 threshold you won't pay any extra tax at all. After thirty years you'll pay the same tax as people who didn't go to university, regardless of what you earn. If you're lucky enough to have a very high paid job it's possible that you might stop paying the 9% extra sooner than the thirty years, because the government sets your extra 9% payments against a notional charge for the cost of your degree course, and if you're earning a lot of money you might pay all of this notional charge before the thirty years are up."
  • MsHobboMsHobbo Forumite
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    I lose sleep over my son's student loan, I'm hopeful that he earns a decent salary one day, then this thing will have accrued a mountain of interest. Surely there are losers from this system and it's just not good enough to try and reassure us not to worry as most won't pay off loans - some will and by then the 6% will have made them exponentially larger.
  • Ed-1Ed-1 Forumite
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    MsHobbo wrote: »
    I lose sleep over my son's student loan, I'm hopeful that he earns a decent salary one day, then this thing will have accrued a mountain of interest. Surely there are losers from this system and it's just not good enough to try and reassure us not to worry as most won't pay off loans - some will and by then the 6% will have made them exponentially larger.

    If reports on the government's review of the system are accurate (e.g. https://www.thetimes.co.uk/article/cut-university-tuition-fees-to-7-500-and-slash-interest-on-student-loans-review-n8lbkhz3s)
    then the high interest rate won't be around much longer (although the 30 years might be extended).
  • Middle_SisterMiddle_Sister Forumite
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    I read that it would be worthwhile paying off student loan if you were earning say £70,000. That you would save roughly £75k in the long run.
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