Should you repay your student loan?
If you have a student loan have you ever considered repaying it early? Interestingly the answer is not as simple as you may think. That’s because student loans aren’t like normal loans. In fact, arguably they are not loans at all.
Student loans are, in effect, an additional taxation rate applied to post-graduates’ salaries for up to 30 years. Unlike personal loans, the details of your student loan do not get reported to credit reference agencies so lenders take little, if any, notice of them when assessing your application for credit e.g. unsecured debt or a mortgage. However, they will take into account the loan repayments in calculating your affordability.
Another peculiarity of student loans is that if you make a partial lump-sum repayment it usually makes no difference to your overall repayments meaning that many student loan partial repayments have been futile. So before you decide to make a partial repayment check Moneysavingexpert’s Student Finance Calculator first.
Rather bizarrely some post-graduates will repay nothing whereas high earners will repay a lot. Also, the amount you repay will depend on when you graduated. Up until 2012, there was no real cost for post-graduates as the interest rate was set at the level of inflation. However, since then everything has changed.
Once you leave university, you only repay when you’re earning above £2,214 a month (equivalent to £26,575 a year) and then it’s fixed at 9% of everything you earn above that. This salary threshold will increase to £27,295 from April 2021.
For example, in March 2020 RPI inflation rate was 2.6% (up from 2.4% in March 2019), interest charged from September 2020 was between 2.6% and 5.6%, depending on whether you were studying or graduated, and how much you were earning.
If you had become a student in 2019, you borrowed £9,250 for fees and £8,944 living costs per year, so £54,582 in total. With assumed 3% inflation and graduate earnings growth at inflation plus 2% a year.
The following table (source: Martin Lewis Student Loans Mythbusting moneysavingexpert.com) gives examples of how long it will take to repay your student loan, if at all, based on various levels of salary.
|(AUG 2022)”||SALARY AFTER 30 YEARS/WHEN DEBT CLEARS||TOTAL AMOUNT REPAID||WILL I FULLY REPAY IT?|
|£55,000||£177,390||£137,380||Yes – 25 years|
|£60,000||£167,160||£121,310||Yes – 21 years|
|(i) Assumes student loan repayment threshold goes up in line with our assumption of average salary increase.|
Interestingly only high earners are likely to repay their student loans early and they are the ones who will repay the most.
On the other hand, people who graduated before 2012 are likely to have repaid their student loans typically within 10 years because they had to make larger monthly repayments.
What is worrying is that inflation is forecast to rise so repayments will increase. Already student loans are suffering higher interest rates than first-time buyer mortgages and the situation will get even worse once inflation rises.
The Government has already announced it’s selling off the remaining £40 billion of student loan debt it has – a concern to many of the over four million university leavers since 1998 with outstanding loans. In itself that can’t change the terms and structures of the way the loans work but it can change operating practices which may be a pain in the neck for some.
Yet it’s important to understand Parliament is ‘omnicompetent’ – in other words, it’s completely free to make and change rules made in the past. This means there is no 100% guarantee the system will remain unchanged for the 30 years until you’re clear. It’s worth being aware this is a risk factor.
Unless you are on a very low salary of, say, £20,000 p.a. or less or unemployed you will repay more money on a student loan than on a mortgage** based on current interest rates. This begs the question should you buy your own house first then once you have created equity in your property, consider re-mortgaging it to release equity to repay your student loan in full. However, do check the figures first. Do the number crunching. Then make an informed decision whether or not to repay it in full.
Remember every individual case is different and each one needs to be judged on its own merits. However, with interest rates and inflation both set to rise it looks increasingly likely that more and more graduates will make the decision to repay their student loans early in full themselves or with assistance from their parents. You know it makes sense*.
* The contents of this blog are for information purposes only and do not constitute individual advice. All information contained in this article is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information,
we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
**Your home is at risk if you do not maintain mortgage repayments.