Most former graduates are asking whether they should pay off their students loans if they have got extra cash or not.
The response on whether you should pay your student loan or not depends on the time you studied and whether you have another debts or not. It dictates that your interest is 1.6% or 1.25% for the 2016/17 academic years.
This guide is suitable for all students who started university before the year 2012 and Northern Irish and Scottish students who started school after 2012.
I will focus on helping you work out your student loan repayment situation, the way you are affected, and whether, you should pay off the student loan debt.
This guide has four steps to help you out:
Step 1: Check The Type of Your Student Loan:
There are different types of student loans and the way each student loan work is distinct depending on the time you started higher education.
For every person that started higher education between 1998 and 2011, and Northern Irish and Scottish learners who started after the year 2012, your loan type is, the ‘Income-contingent’ loan.
The current interest rate on this loan is 1.25%
The interest rate for student loans from the Sept the year 2017 will still remain 1.25%. This is based on the UK inflation rate.
How the student loan interest rate is set – The loan interest rate is the LOWER of the following:
Either… the base of the Bank of England, plus 1%
Or… the inflation rate in the UK. The interest rate remains constant for one year on 1st September on the basis of inflation rate from March of the previous year.
Therefore, starting 1 September of the year 2016, the base rate of the interest, plus 1%, thus, being 1.25%.
Number of unpaid loans in UK: Approximately 3,000,000 by April 2017.
The amount you will repay – You repay your student loan with 9% of everything you earn exceeding £17,775 a year.
How you pay the loan:
For employees – the main is automatically taken from you payroll just like tax is deducted.
For people with other income source or self-employed – You are charged with the responsibility of notifying HM Revenue and Customs of the payments you receive after doing self-assessment.
There is no impact that student loans can have on personal credit files whatsoever.
You cannot differ from paying your student loan unless you are earning less than £17,775 a year.
Apart from deduction from the salary you earn, you can overpay the loan by the use of cheque, cards or bank transfer.
Step 2: Why student loans are different
There are three main facts that differentiate student loans from other forms of borrowing. You need to understand them before being able to make a rational decision
1. They do not have any “real cost” of borrowing
This applies only to pre-1998 and post-1998 loans but does not apply to new academic starters from the year 2012 onwards.
This applies because; there is no “actual” interest cost because much of what you pay is the inflation rate – the rate at which prices are going up.
2. If you don’t earn enough, you don’t need to repay
For normal borrowing, you must pay no matter how much you ear. This is not the case with student loans. If you are not fortunate enough to earn over £17,775 a year which is regarded as enough, you do not have to repay the loan.
It is vital to consider this aspect in determining whether you should repay you student loan or not.
3. The debt is wiped after 30 years or if you die
Student loans have a life that is fixed, though the exact time the loan wipes of depends on the loan you have. Most student loans wipe off after 30 years from the time you completed you higher education program or if you die.
Step 3: Pay off other debts first
A golden rule exists for every individual with more than one debt:
The higher the rate of interest, the quicker a debt grows and so, it would be better to get rid of it sooner.
Given that the interest rate of student loans is 1.6% or 1.25%, which is lesser than any other debt; you better pay off other debts before embarking on the student loan repayment.
Step 4: Debt-free – Is it better to repay the loan than save?
It is inadvisable to repay off the student loan off quickly than it is provided for two main reasons:
Reason 1: Saving the money earns more compared to the cost of the student loan
Saving the money you want to use to repay the loan quickly to a top bank account outweighs the cost of student loans for taxpayers’ basic-rate.
This became much better and more beneficial in April 2016 as all savings accounts give you all interest earned without tax deductions under the allowances of personal savings.
Thus, it is better off saving the extra money than repaying the
student loan quickly.
In fact the equation for calculating the profit is quite simple – if you can EARN more from savings (after tax) than the loan is costing you, then you’re better off saving.
Reason 2: Avoid having to borrow back at higher rates
For all holders of student loans, the incredible additional reason is that, with a loan already, you cannot borrow another one. Repaying it off quickly subjects you to the risk of needing to borrow which will be more expensive compared to student loan.
Therefore, it is better saving and getting full interest rates and stay away from borrowing more expensive loans than paying it off quickly and borrowing again.
Reason 3: Put the Money you have to better use
If you have a lot of cash, you should invest the money in a more productive activity.
Most of you think having a student loan prevents you from getting a mortgage, it doesn’t. The truth is, you can only get a lesser mortgage than normal.
Given that the student loan detail does not show up on the personal credit file records, it does not affect your borrowing capabilities.
Repaying student loans is necessary for individuals earning over £17,775 a year but I wouldn’t advise you to make a quick repayment of the loan for the above reasons.
Boczko, T. (2016). Managing Your Money. Palgrave Macmillan.
Davis, P. (2016). Student Finance For Dummies. John Wiley & Sons.
Great Britain., & Great Britain. (2013). Student loan repayments: Department for Business, Innovation & Skills : report. London: Stationery Office.
Pickard, S. (2014). Higher education in the UK and the US: Converging university models in a global academic world?. Leiden: Brill.