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    • jackjackjack
    • By jackjackjack 13th Aug 19, 5:47 PM
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    jackjackjack
    Repaying early/refinancing: mathematical/political advice needed!
    • #1
    • 13th Aug 19, 5:47 PM
    Repaying early/refinancing: mathematical/political advice needed! 13th Aug 19 at 5:47 PM
    Overview:
    I'm about to commence my career in September after graduating two years ago. Hence, I am looking into all my financial affairs whilst I have time. I am debating the refinancing my SL by having my parents take out a loan to pay off my SL in one go, and me paying them back at a lower interest rate. Is this a good idea? I have attached an image of the spreadsheet I used to aid my calculations.

    Note:
    I am neither a mathematical nor financial whizz and am not pretending to be one! Since this is a huge financial decision I want to get advice if possible :-)

    The advice I am looking for:
    - is my mathematical methodology reasonable?
    - do you think that I should refinance and pay early based on the maths
    - do you think that the political situation might change so that loan repayments are cancelled and I needn't be concerned about paying off my loan at all? I am aware it's a 'goal' of the labour party to wipe student debt.
    - do you have any other suggestions and what have I not considered?

    Facts:
    - began undergrad in 2013, completed 2016 (£9k/year PLUS ~£3600 maintenance SLs)
    - began masters in 2016, completed 2017 (£10k PGL loan)
    - total debt currently £55,024
    - beginning full time employment this coming September
    - roughly £40,000 annual starting salary including bonus
    - salary progression about 10% per year (calculation below)
    - I'm 23 (not sure if this makes a difference)
    - I am assuming my parents can get a loan cheaper than SL apr. I have calculated refinancing costs at various interest rates (calculations below)
    - interest rates via the SLC is assumed to always be RPI+3% (lol)
    - repayments are based on RPI and my annual salary.

    Method

    Part 1: will my remaining debt be wiped?
    To begin my investigation I read an article by Martin Lewis stating it isn't a good idea to repay early in most circumstances. I think the figure is 83% of students won't pay back their loans. Consequently, I calculated whether I'm likely to pay off my loan within the 30 year period. I figured that if I will pay back all of my loan within 30 years it is probably worth considering early repayment to save interest costs. To do this, I 1) found out and worked out my average % salary progression and 2) factored a range of estimated increases into the 'student loan calculator' repayment calculator I found online.

    My starting salary is around 37,000 without bonus. It is likely to rise with promotions to about 110,000 within approx 11 years. This is an average increase of about 10%. Factoring all the information into the calculator (and assuming RPIs of 2-6%) I will pay off my loan within 16 years. If my average wage increase was only about 7% I would repay after 22 years. Now, the calculator isn't fully accurate because it doesn't take into account PGL repayments of 6% above threshold earnings. This info is in the image below.

    From this I concluded that I should continue investigating.

    Part 2: what will the total repayments come to at various RPIs/wage increases?
    This might be best explained with my spreadsheet. I used the same online calculator, calculating the total repayments if I earned 4% above RPI and 8% above RPI (I wanted to work work out the situation in two 'extreme' wage scenarios). For each, I worked out the total for an average RPI of 2%, 3%... 6% and the years taken to repay.

    Extreme calculation results:

    Assuming 4% above RPI wage increases, avg RPI of 2% = £111,499 in repayments after 23 years. An avg RPI of 6% means £184,655.

    Assuming 8% above RPI wage increase, avg RPI 2% = £93,646 in repayments after 17 years. An avg RPI of 6% means £141,335.

    Part 3: what would be the total repayment at various interest rates and terms (and also the monthly repayments owed)? For this I used a simple loan repayment calculator. I worked out the total repayment of a £55k loan at 2%-7% fixed interest. All results are in the spreadsheet. In short, total repayments would be between £64,226 (2% apr) and £90,293 (7% apr) over a 16 year term and £68k / £106k over 22 years.

    Conclusion

    Okay, so I think it's worth refinancing from a purely financial perspective (not taking into account things like being out of work or debt being cancelled). Let's assume a 'best case' scenario for not refinancing. I mean, if RPI is 2% and I end up earning 8% above RPI. I would pay £93,646 over 17 years. The only situation where that cost is less than if I refinanced is if the refinancing loan is 7% interest paid back over 16 years.

    On the flip side, I could earn just 4% average wage increase above RPI and repay £184,655 over 22 years. Or, I could refinance to pay £67,903 (2%apr) over the same period.



    So now I put it to you. What do you think?

    *i am extremely grateful if you've read all this and are willing to respond. if you need more info, just ask*

    Thanks !!

    I apparently cannot post links. Just go on imgur and change the url to include this at the end:

    /a/e9SkfWq
Page 1
    • silvercar
    • By silvercar 13th Aug 19, 8:25 PM
    • 39,470 Posts
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    silvercar
    • #2
    • 13th Aug 19, 8:25 PM
    • #2
    • 13th Aug 19, 8:25 PM
    You are far more likely to repay the PGL in full as it is smaller. So clearing that one may be an option.

    There are so many unknowns that I’m not sure it will definitely be worth banking on you being in the 17% that will repay your undergraduate loan, though I think if you remove interest from the equation and consider how many repay all the loan excluding interest the figure will be much higher than 17%.
    • jackjackjack
    • By jackjackjack 13th Aug 19, 9:23 PM
    • 11 Posts
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    jackjackjack
    • #3
    • 13th Aug 19, 9:23 PM
    • #3
    • 13th Aug 19, 9:23 PM
    Thanks for your response. I suppose something I could also consider is paying a proportion of the SL loan off so I don't fully commit either way. Paying off the PGL would be a good way of doing this.
    • silvercar
    • By silvercar 14th Aug 19, 5:41 PM
    • 39,470 Posts
    • 163,563 Thanks
    silvercar
    • #4
    • 14th Aug 19, 5:41 PM
    • #4
    • 14th Aug 19, 5:41 PM
    Thanks for your response. I suppose something I could also consider is paying a proportion of the SL loan off so I don't fully commit either way. Paying off the PGL would be a good way of doing this.
    Originally posted by jackjackjack
    If you are going to do this you may have thrown money away if you end up with some write off.

    If you clear the PGL you will also be reducing your monthly repayments, so that would be the only partial repayment I would consider.
    • grumiofoundation
    • By grumiofoundation 15th Aug 19, 12:21 PM
    • 151 Posts
    • 138 Thanks
    grumiofoundation
    • #5
    • 15th Aug 19, 12:21 PM
    • #5
    • 15th Aug 19, 12:21 PM
    Not paying it off is the safe option. This is because in reality the “loan” you have is not a loan but a form of taxation, you will never be in a situation where anyone will be chasing you for this debt. This is not the case with the loan your parents would take out.

    You may well end up paying back more if you don’t pay off now but the risks of taking the loan out are much higher (depending on situation). However you have to consider how you circumstances may change over the next decades, are you willing to take the “bet” on yourself?

    You say the idea would be your parents take it a loan and you repay them? I may have missed this in your post but the key is your parents financial position. They are the ones taking all the risk here. If there is any risk this could backfire and they could end up losing their house, not being able to pay for care etc you should not even be entertaining this at all!

    Questions are:
    What happens in an emergency? What is the contingency plan for what happens if you are unable to make payments to them? Are they able to make these payments themselves without you paying them, and will their income change (pension etc)?
    • jackjackjack
    • By jackjackjack 21st Aug 19, 4:08 PM
    • 11 Posts
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    jackjackjack
    • #6
    • 21st Aug 19, 4:08 PM
    • #6
    • 21st Aug 19, 4:08 PM
    you have to consider how you circumstances may change over the next decades, are you willing to take the “bet” on yourself?
    Originally posted by grumiofoundation
    This is one of the biggest things I have to consider. I haven't started my career yet, but barring me deciding to sack in full time employment OR some kind of external factor such as sickness/tragedy, I would back myself to pay it all off.

    You say the idea would be your parents take it a loan and you repay them?

    Questions are:
    What happens in an emergency? What is the contingency plan for what happens if you are unable to make payments to them? Are they able to make these payments themselves without you paying them, and will their income change (pension etc)?
    Originally posted by grumiofoundation
    Yes, that's my idea. I think they would get a loan easier and cheaper than I. I think they would have enough clout to cover the loan if things went bad for me and I couldn't pay it off.

    If I was completely unable to pay back the loan, I suppose my parents would need to dip into their savings/my inheritance. If they ended up needing to repay £50k it would be possible for them but certainly would sting.

    I hope that information is coherent and detailed enough.

    EDIT: if i paid it all off now and a future government decided to wipe all student debt, would they reimburse me for what I had paid off?
    Last edited by jackjackjack; 21-08-2019 at 4:21 PM. Reason: final comment
    • silvercar
    • By silvercar 23rd Aug 19, 12:11 PM
    • 39,470 Posts
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    silvercar
    • #7
    • 23rd Aug 19, 12:11 PM
    • #7
    • 23rd Aug 19, 12:11 PM
    Of all the considerations, your last one isn’t one that would tax my mind. The chances of any government writing off the future income that repayments give is remote in the extreme.
    • JayRitchie
    • By JayRitchie 25th Aug 19, 3:20 PM
    • 284 Posts
    • 293 Thanks
    JayRitchie
    • #8
    • 25th Aug 19, 3:20 PM
    • #8
    • 25th Aug 19, 3:20 PM
    What career are you in? What makes you think you will reach a salary of over £100k per annum? Is this figure inflation adjusted or not?
    • jackjackjack
    • By jackjackjack 1st Sep 19, 10:52 AM
    • 11 Posts
    • 0 Thanks
    jackjackjack
    • #9
    • 1st Sep 19, 10:52 AM
    • #9
    • 1st Sep 19, 10:52 AM
    What career are you in? What makes you think you will reach a salary of over £100k per annum? Is this figure inflation adjusted or not?
    Originally posted by JayRitchie
    Management consulting. I also have a small e-commerce business that gives me £2-5k profit each year (but this isn't factored into any calculations I've made). The figures I have are all inflation adjusted.

    Also, apologies for the late replies!

    Thanks
    • JayRitchie
    • By JayRitchie 1st Sep 19, 8:57 PM
    • 284 Posts
    • 293 Thanks
    JayRitchie
    I cant manage to find your calculations but am suspicious of the sizes of the numbers you note. Is there a link to how you have calculated this?

    My general view (from having made such calculations) is that it is probably not wise to pay early unless you (or your parents) have enough cash that the loss of the money wouldn't hurt. I certainly wouldn't let anyone borrow to repay the money early - but assume that at the interest rate you note that this would be your parents loss of bank interest rather than a loan.

    Unlike one pp I think there is a chance that a future government scales back the level of student loans and as part of this process reduces balances owed on existing loans. I doubt you would get any refund in this case - but would be hit by higher taxes. A real double whammy!
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