Of course, everyone starts with a grace period until the April following graduation, and a minimum income of £21,000 is also required before a percentage is deducted towards repayment. With this in place, should you be working to repay loans as quickly as possible? Here are a few key questions to consider to help you figure out your best repayment strategy for your student loan.
What kind of loan do I have?
This is the question of how much of your debt is made up of government versus private loans. Many do not require private loans, but if you have an expensive study course to supplement, this may have formed part of the debt. Investigate more about the types of student loans by checking out Student Money Saver’s guide – this details a whole variety of questions intrinsic to the nature of the loan itself, and can help establish where you are at to begin with.
What interest rates are attached?
This depends greatly on when you acquired your loan. The current interest rate from September 2016 is 4.6 per cent, which is based on the rate of inflation plus 3 per cent, and fixed for the year from March onwards.
Note though that government loans are different from private loans: they move alongside overall inflation, which means you aren’t really paying back ‘more’ as such. Your wages and the cost of living are rising in tandem with inflation, which means your ability to repay is also in line with inflation. Sometimes, negative inflation can apply too, meaning your debt will shrink.
How can I pay towards the loan?
Most people who are employed full-time will have the money deducted automatically from their pay, like a tax. This is dependent on earning above the threshold, and in some cases, you have to be aware yourself and ensure deductions are being taken. This means declaring you have a student loan as not all employers will automatically think to ask.
If you are self employed, this is again up to you to declare your income and therefore your payments.
Will the debt be wiped?
One of the most powerful arguments for not rushing in to repayments is the fact that student loans have a fixed lifespan – they are wiped after 30 years, or if you pass away. This is very different to private loans, where they can continue to exist beyond your lifespan and are never wiped. If you rushed to repay, you might have repaid a debt you didn’t need to. Earn up to 4% from a great savings account, instead of putting the money towards a 1.6% inflation rise cost.
Should I save instead?
Chances are, yes, you should be saving instead. For anyone with a loan from after 1998, you can earn better interest from a savings account when you pay basic-rate tax. This has only become more obvious as the tax-free personal savings allowance has risen – this means you can earn more tax-free interest than before.
Investigate more of the best Cash ISAs to make the most of these perks.
What else could I use the money for?
Chances are, you won’t have too many other debts at this stage of life. Of course, if you did acquire some private loans, these should take priority – they will accrue more interest and affect credit scores. So if you do have personal or private loans which you took out for the purpose of supplementing a government loan, focus energies on eliminating these.
However, repaying your loan rather than saving means that you are likely to remain a renter for longer, and require more expensive debt down the track in the form of a bigger mortgage or a bigger loan to start a business, etc. These are personal loans with much harsher interest rates, and unlike your student loan, they affect your credit score. This means that you can be putting that money to better use in your savings for a mortgage or other investments.
Other investments of this nature may include funds, whether they are peer-to-peer or otherwise, which can yield a 5 per cent return year on year. This is clearly better than the cost of additional interest on your student loan at 1.6 per cent, For even more ideas on ways to invest your money, instead of repaying your student debt.
Overall, there are lots of good reasons to put off repaying a student loan – but only if this is a government loan. Private loans should always take priority, as they are not forgiving in the way that student loans are. Consider your long term goals – whether it’s saving for a house, starting a business, or otherwise – and factor these in to your repayment priorities.