Author Topic: UK student loans - worth paying off?  (Read 4590 times)

Taffy

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UK student loans - worth paying off?
« on: June 17, 2012, 09:16:56 PM »
First post, great community you have here.

I'm a stubbly protomustachian with some decisions to make. My net worth is essentially zero (a big improvement on a year ago - I started being mustachian before I knew the word!). I have enough in the bank to pay off my student loans entirely; would this be a good move? I'm thinking that as UK student loans are essentially interest-free (inflation-only loans) then it would probably make sense to just pay the minimum, and hopefully invest the cash elsewhere with greater returns. It would only make sense to pay the loans off if I'm not confident I can beat inflation elsewhere. Am I right?

arebelspy

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Re: UK student loans - worth paying off?
« Reply #1 on: June 17, 2012, 09:46:52 PM »
Correct.

Unless there are other mitigating factors (you have a strong aversion to debt, need high cash flow, are getting into an unstable situation income-wise and are not sure you could make the minimum payments, etc.), it would be better to invest the money elsewhere than pay down interest-free debt.

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Taffy

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Re: UK student loans - worth paying off?
« Reply #2 on: June 17, 2012, 11:23:32 PM »
Thanks, I suppose that cash will be headed into a stocks & share ISA then.

catalana

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Re: UK student loans - worth paying off?
« Reply #3 on: June 20, 2012, 06:13:14 AM »
Make sure that your student loans are definitely charging inflation only.  The schemes have differed over the years.

Next consideration is that there are very few cash accounts to beat inflation.  If you are going to invest for the long term, then yes, use S&S ISA.

If however you might want a house deposit in a few year's time you might consider staying with cash or paying off your loans.

Taffy

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Re: UK student loans - worth paying off?
« Reply #4 on: June 28, 2012, 03:12:24 AM »
Definitely inflation only. You're right about the house deposit might be worth putting cash in a three-year fixed-rate ISA that will (just about) beat inflation for a future house purchase. Of course if interest rates rise significantly in that time you end up looking a bit stupid, but I feel fairly confident that they'll hold low for at least the next couple of years.

manchops

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Re: UK student loans - worth paying off?
« Reply #5 on: June 28, 2012, 12:51:25 PM »
There is also an emotional piece to debt, which shouldn't be ignored. Some folks have a nagging feeling about debt that can cause additional stress. While many can ignore it, there are reasons other than financial to pay that debt off first.

That said, if you think you can make more than inflation with your investments, then from a purely financial perspective, you should invest and pay minimum.

Shandi76

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Re: UK student loans - worth paying off?
« Reply #6 on: June 29, 2012, 06:37:41 AM »
What is the time period for paying back the loans, and how big is the monthly payment? Is it CPI or RPI? If the rate is high enough, even if it is just inflation it might be worth overpaying, depending on your short and medium term financial goals (e.g. EF, house deposit etc).

I deferred my student loans for years (that was on the old scheme where you had to be making 85% of average (mean) earnings before you had to start repaying), but you had to pay them off over 5 years once you were earning enough to pay them back. The 100pcm was an annoying addition to my budget, but the interest rate was low so it didn't make sense to pay it off. But after a couple of years they put up the interest rate to 4.8% so I decided I'd rather just pay if off in a lump sum and start investing the extra 100pcm it freed up in S&S ISAs. Maybe I would have come out a little ahead if I had invested the lump sum rather than the 100pcm for the 2 1/2 years I would have had left repaying it, but it was so nice to see my savings rate increase, even though I had given up a bit of capital to do that.


Taffy

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Re: UK student loans - worth paying off?
« Reply #7 on: July 02, 2012, 01:45:56 AM »
Current interest rate for me is 1.5% (likely to be revised in September): Historical interest rates for Plan 1 loans. At that rate, I can find better uses for my money.

I finished my studies in a kinder age, but the kids nowadays get royally screwed, at RPI + 3% while they are studying (so currently a heart-stopping 8.3%), then RPI plus an income-based percentage after that. For those paying according to this Plan 2 schedule, paying off the loans should be a matter of the utmost urgency.

catalana

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Re: UK student loans - worth paying off?
« Reply #8 on: July 02, 2012, 06:06:16 AM »
Current interest rate for me is 1.5% (likely to be revised in September)
So the rate is increasing to 3.6%?

Shandi76

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Re: UK student loans - worth paying off?
« Reply #9 on: July 02, 2012, 10:35:21 AM »
Taffy, I would never have paid off my loans if they were at 1.5% :-) I'm sure you can outperform that with investments. But keep an eye on interest rate changes. I'm sure they'll try and get more money out of you soon enough.

Taffy

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Re: UK student loans - worth paying off?
« Reply #10 on: July 03, 2012, 10:04:33 PM »
So the rate is increasing to 3.6%?
I think it's unlikely it will go that high, and it will hopefully be 1.5% for 2012/13 too.

...keep an eye on interest rate changes. I'm sure they'll try and get more money out of you soon enough.
Absolutely. I think the government isn't allowed to tamper with Plan 1 loan rates but I have set up a calendar alert to get me to check the rates once a month just to be sure. If it went above 3.5% I'd probably just pay it off in one go.

Taffy

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Re: UK student loans - worth paying off?
« Reply #11 on: July 04, 2012, 01:33:27 AM »
Sorry, original comment edited pending a fuller understanding of the situation.

Second edit: it seems the above comment stands. Sorry for any confusion.
« Last Edit: July 05, 2012, 02:09:17 AM by Taffy »