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Further education

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Original poster

should I pay off my student loan with this lump sum?

26 replies

jmox · 26/05/2015 19:01

Hi everyone,

I'm not actually a mum but just wanted some advice on this and thought this would be a good place to ask.

So I really am not sure what to do with this money that was left to me by a great uncle. I wasn't going to include figures but I think it will make everything clearer.

Basically I have just finished my 4 year degree, and have a student loan repayment of £27,100. My great uncle left me with £20,000 when I was 15. My parents' plan was always for me to use this toward my uni fees.

So my plan was to take out about £2,000 to travel, then use the rest (£18,000) of the £27,000 to pay off in a lump sum, leaving me with £9,000 to pay back once I start earning £21k+.

I had always sort of just accepted that this is how I'd use the money and never thought much of it but having spoken to a few friends (and some of their parents) they seem to agree that paying a big amount in a lump sum is in a way a waste of money, and I may as well keep this £20k (or at least most of it) as I pretty much have the rest of my life to pay my loan back.

Part of me wants to be 'sensible' and thinks that paying off the £18,000 would be like a big weight off of my shoulders, knowing I have just £9,000 to pay off after. But should I just keep this £20,000 and pay off my loans across my lifetime? Can I get some general opinions on what you would do in this situation or advice your children to do?

Thanks in advance

OP posts:
bangbangprettypretty · 26/05/2015 19:16

Money Saving Expert says that student loans are the only debt where there's no point paying back early.

The repayments will increase but only in line with inflation.

If I were you I'd put it into ISAs or invest it. I had an inheritance and chose not to pay my student loan back - it now comes out at about £30 a month now so I barely notice it.

3littlefrogs · 26/05/2015 19:18

No.
You could make so many more sensible investments.
You do have the rest of your life to pay the loan back, but get professional advice about investing your inheritance.

FishWithABicycle · 26/05/2015 19:23

Do you know for certain what career you are going to pursue? Whether you will definitely earn over 21k within the next few years? When will you be settled enough in your career and location to think about buying a house?

The answers to your dilemma won't be obvious even with this info but they should be considered.

A huge number of people will never repay their student debt - this isn't exactly a bad thing. Effectively although the "headline" fees are £9k only the people who end up richest pay this amount. More average people will typically pay back around 60-70%. People who end up being low paid their whole career won't pay much at all. So paying a lump sum now will definitely save you money if you are going to be on 60k by the time you are 35. But if it takes you till you are 30 to get to earning 25k and then you stay around then gradually increasing to 30k or maybe 35k and then sticking around there (not that unlikely, not every graduate can be in charge of a high-level division of some organisation that pays big bucks) you will lose out. Plus you'll find it really difficult to save for a mortgage deposit.

I'd be inclined to stick it in a long term savings bond with a secure and guaranteed decent return for 5 years. After 5 years you'll have a better idea of where your career is headed, where you want to live etc and can make a decision with a bit more maturity too.

shattered77 · 26/05/2015 19:26

Yes, I always read that your student loan was the last thing to be paid. Take some for travelling, then the rest in savings for a mortgage deposit.

AmandaTanen · 26/05/2015 19:30

I would use it as a deposit for a flat/house. It took me a while after graduating to earn enough to start paying back my loan.

namechange0dq8 · 26/05/2015 19:34

No, student loans are the cheapest and softest money you will ever borrow. Under no circumstances should you pay it off unless either (a) you have so much money you will never want for anything, and can buy a house for cash right now or (b) you are likely to get a very high paying job in your forties or fifties having earned nothing between now and then.

You appear somewhat confused as to which scheme you're on, however. Surely if you have just finished a four year degree the threshold for repayment is 16k and then 6%, as you're on the pre-2012 scheme? The 21k then 9% scheme is post-2012. That will affect the extent to which there is a write-off in your scheme.

Springintosummer · 26/05/2015 19:35

Yes to saving it for a deposit for a home. Student loan has the lowest interest rate of all loans and if you are not earning you don't pay.

Original poster
jmox · 26/05/2015 20:43

thanks so much everyone for the advice. I am actually talking to my brother about it now on the phone and he keeps bringing up inflation. He also mentioned that having very little debt may look good for a credit rating?

It's a massive toss up I think and something I will need to carefully consider!

OP posts:
bilbodog · 26/05/2015 21:44

No brainer - go travelling and have a fabulous time whilst you can. Invest the rest and use it when you come back and settle into a routine job. You might need it to buy a car depending on where you live or to put towards a place to live. Have a ball!

KnitFastDieWarm · 26/05/2015 21:48

Student loan debt isn't like other debt and a lot of people don't understand this! Modern Student loans don't affect credit rating in the same way as other loan types. If I were you I'd put the money aside for a deposit on a house or flat. You shouldn't have trouble getting a mortgage one day with student loan debt outstanding, but you sure as hell will have trouble if you don't have a deposit!

I would seriously urge you not to WASTE £20k paying back the softest, most hassle free, least stigmatised debt you will ever have!

OliviaBenson · 26/05/2015 21:49

It doesn't count in relation to debt in the usual sense- ie a mortgage doesn't take it into account the same way it would a more traditional bank loan.

You would be really silly to pay it off in my view- use it as a deposit for a house.

I know people who paid off their student loan rather than their mortgage and they really regret it.

Have a read on moneysavingexpert.

KnitFastDieWarm · 26/05/2015 21:51

Source for above - I work in Financial services (although obviously this doesn't constitute professional advice, it's just what I'd tell a friend)
I also bought a house last year and there is NO WAY Dh and I could have bought so young without our 20k deposit. We both still have student debt outstanding and to be honest I never give it a second thought - it's just like paying tax each month.

MinesAPintOfTea · 26/05/2015 21:54

It has no impact on the debt level you're considered to have: it isn't a risk like that. It simply reduces your income, but not by as much as saving for the equivalent house deposit.

I was offered the lump sum to pay off my loan when I was 21. By 25 my industry had collapsed, I was jobless, pregnant, a homeowner and doing a postgraduate degree to change my direction. Only possibly because I had that lump sum (and DH) behind me. A lower student loan would have been worthless.

KnitFastDieWarm · 26/05/2015 21:54

I can't urge you enough not to do this - you may as well burn it, really!Grin

Athenaviolet · 26/05/2015 22:03

I came on to say the same as first poster, money saving expert/Martin Lewis says don't pay off student loans early and that's good enough for me!

The best way to invest money is:

  • education
  • driving lessons/car if it'll help with employment
  • buying somewhere to live
  • spread excess wealth amongst a variety of vehicles to minimise risk of 'putting all eggs in one basket' eg shares, bonds, national savings, 3 months expenses in cash and use your isa allowance.
BakerStreetSaxRift · 26/05/2015 22:07

DO NOT DO THIS! (sorry for shouting)

Your student loan has no effect whatsoever on your credit rating.

DH and I went for a mortgage interview before we bought our house, she asked if we had any debts, I said "just my student loan" and the bank manager instantly dismissed it and said "that doesn't count".

Keep the money so you can use it as a deposit when you're in a stable job and wanting to buy a house.

DareGreatly · 26/05/2015 22:14

Only if you have a pre-1998 mortgage style loan should you rush to pay it off. Fingers crossed student loans today don't get sold off like the pre-1998 ones did. We also thought our loans would be cheap and stigma free. The reality is that Erudio now contacts credit agencies if you defer, nevermind default. See the Erudio threads for the grief they've caused.

But that aside - luckily you're not in that position. Enjoy/invest the £££!

BackforGood · 26/05/2015 23:42

Try to think of it as a "Student Tax" rather than a "Student Loan".

You only need to make payments in those years when your income is above £21,000. Whenever it isn't - be that a lower paid job or working PT, or if you ever beome ill or are made redundant, or, if you take maternity leave or decide to be a SAHP, or if you decide to start your own business or to free lance, then there are likely to be years when you aren't earning £21,000.
If you've paid off your student loan but have had to borrow an extra £20,000 on your mortgage, you won't be able to stop making payments to your mortgage company when you are on a low income, in the way you do with your student loan payments.

It really doesn't make sense to pay off your student loan with this money. Invest it to put towards a deposit on your first home.

Don't trust us alone though - as advised upthread, go onto moneysupermarket and read the advice there.

FishWithABicycle · 27/05/2015 06:55

It does not improve your credit rating to have no debt. Your credit rating depends on a history of managing debt well and making payments on time.

BlackbirdOnTheWire · 27/05/2015 07:21

As everyone else says - do NOT use the money to pay off a student loan. The terms of the student loan are that you pay it off when you earn a certain amount, not that you pay it off with a gift from someone else.

That money would be best used to put towards a deposit for your first property. How would you feel if, some years down the line, you'd paid off the loan with the inheritance, but due to circumstances (eg redundancy, choice of career, non-availability of jobs, illness, taking a break to have a family...) you were still earning below the threshold for repayment? You'd be trying to pay rent AND save for a deposit out of an income considered low enough to write the loan off. What exactly would you have achieved with the money? Think of the loan as a graduate tax (which is pretty much how it behaves) - would you give the inheritance to the taxman right now and tell him you would like to make an advance payment of your tax for the next few years?

Don't forget that a mortgage is also a form of debt. Using the inheritance to lower that source of debt in the future would be a much smarter thing to do (or as a contingency for repayments of that debt).

icklekid · 27/05/2015 07:41

I was in a similar situation and used it as a deposit for a house by myself-I wouldn't have been able to save that amount for a long time. I felt very lucky to be able to get on the property market. I just ignore my student loan and it gets paid off eventually!

RustyBear · 27/05/2015 07:47

While I wouldn't pay it off now, I would keep an eye on the news, as the Tories may be at least considering the possibility of selling off another batch of loans- it was one of the things the LibDems blocked during the coalition (belated remorse, perhaps?) but now they are free to try again...

NoArmaniNoPunani · 27/05/2015 07:55

I'd use it as a deposit on a flat. Student loans aren't considered when applying for a mortgage so it won't affect that.

namechange0dq8 · 27/05/2015 14:15

While I wouldn't pay it off now, I would keep an eye on the news, as the Tories may be at least considering the possibility of selling off another batch of loans

So what? They can't change the terms, so if the loan is sold off, what odds would that make?

RustyBear · 27/05/2015 14:23

I wouldn't be too sure, namechange

www.theguardian.com/money/2013/jun/13/raise-interest-rate-student-loans-secret-report

"Despite [the NUS] pushing them to establish in law that conditions on student loans could not be altered retrospectively the government refused and gave weak assurances that they had no plans to do so"