Plan 1 and Plan 2 Student Loan. What should I do?

dieselette · 12 July 2018 at 4:56PM

Hello,

I am 37 and have recently graduated from a degree in healthcare. I took out a Plan 2 student loan to make ends meet. The total loan stands at £6,995. However, in a previous life I studied an unrelated degree. I took a full student loan out on Plan 1 in 2010. This stands at £15,775.

I'm trying to figure out what to do in terms of repayment. The Plan 2 loan is at a much higher interest rate but as the threshold for repayment is also higher than the Plan 1 loan, I can't preferentially repay it. Repayments for Plan 1 will be calculated on my earnings between £18330 and £25000, and my earnings above £25000 will be used to calculate repayments for Plan 2.

Here are the Plan 2 interest rates according to Martin's guide:

- Earn under £25,000: Interest rate = RPI
- Earn over £45,000: Interest rate = RPI + 3%
- Earn from £25,000 to £45,000: It rises gradually from RPI to RPI + 3%. For example, earn midway, so £35,000, and your rate'll be RPI + 1.5%

Plan 1 interests rates stand at 1.5%.

I expect to be earning 25k pa over the next two years, and 30k+ thereafter. I will be classed as self employed, and have a LISA, Stocks and Shares ISA, and will be setting up a SIPP. Am I better off trying to repay, even though the majority will pay off onto my Plan 1 loan, or should I invest any spare money I have?

Thanks in advance for any advice you can offer.

DrEskimo · 12 July 2018 at 8:15PM

What's your situation financially in other areas? Do you have a suitable emergency fund in an easy access savings account? Do you have any other debts, particularly high interest debts?

Generally, I don't think there is motivation to overpay a student loan, as you can typically get better returns elsewhere, and a student loan does not pose the same risks as normal debts (do not have to continue to pay it in the event of a job loss, etc. and it gets written off after a certain period) and I tend to think the same in your situation.

If you have no other debts, and have a good emergency fund of between 3-6months of expenses saved, then I would just put the spare money into a high interest current/savings account, e.g. NationWide Flex current account and flex regular saver. At 5%, these will outperform the interest you save on the student loans.

You can always use that money to pay a lump sum if you change your mind.

dieselette · 13 July 2018 at 6:50AM

Thanks for the reply. I have no have no other debts and my financial plan has been to pay spare money into building my emergency fund, then my SIPP/S&SISA/LISA. I have learned to live quite frugally so I have low outgoings. As my second Plan 2 loan is for a smaller amount than people normally take (~7k rather than ~40-50k) I was wondering if the advice to invest it for a better return elsewhere still holds. I take it you believe it does?

It really stings not being able to preferentially pay off that higher interest 7K!

DrEskimo · 13 July 2018 at 7:52AM

dieselette wrote: »

Thanks for the reply. I have no have no other debts and my financial plan has been to pay spare money into building my emergency fund, then my SIPP/S&SISA/LISA. I have learned to live quite frugally so I have low outgoings. As my second Plan 2 loan is for a smaller amount than people normally take (~7k rather than ~40-50k) I was wondering if the advice to invest it for a better return elsewhere still holds. I take it you believe it does?

It really stings not being able to preferentially pay off that higher interest 7K!

Awesome. well personally I would continue to build the emergency fund, and then put any surplus money in high interest current/savings accounts.

If the interest rate is RPI while you are on £25k, then that I believe that currently is 2.3%. When you are on £30k then it will be about RPI+0.8%. Even if inflation does rise, it's still unlikely to be higher than high interest accounts/savers, like the NationWide accounts paying 5%.

Are you sure you can't make an overpayment and nominate the loan you want to make payment on? Maybe save the money at 5% for a year in the banks, then use it + the interest you earn to make a lump sum payment. This is usually advised when learning the end of the loan anyway, as it prevents overpayment.

Plan 1 and Plan 2 Student Loan. What should I do?

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