Despite higher interest rates Martin Lewis says don't pay off student loan early

[Dunlurking]

Despite the increase in interest rates on students loans, Martin Lewis says don't pay off any of the loan early.
www.theguardian.com/money/2017/jul/17/uk-students-loans-interest-rate-martin-lewis
This is reassuring - he says continue to consider it as a 9% graduate contribution/tax. Only those who start on a £40,000 year salary after graduation and continue with large pay increases would benefit.

Posted too soon - would benefit from paying it off early, I meant to say.

Martin Lewis tends to look at things in a purely individual and accounting way. He does not take on board:

1. Societal aspects. Is it right that more affluent members of society should expect to be subsidised by the less well off. And if Martin Lewis suggests individuals are better off taking loans, it implies there is a subsidy.

1. Individual time preferences. Some people simply don't like debt, prefer to save and pay for things as they go. To some extent it is not the applicable rate of interest, but the personal rate of interest you might apply to money now vs money later.

1. Opportunity cost. If the money is there, and would be left to the DC anyway, why not use it to pay for DCs education so they start adult life with a clean slate. Or, say, this year we are not taking a summer holiday. Instead the money will go into the "Masters fund". Fine as DC are no longer interested in family holidays, we have other things on, and so we are happy to available cash into DC's education.

Nicely put NeedmoreSleep.

We have paid our DC even though we were fully aware that it might not end up being the best financial decision. We really understand the way they work but still chose to pay. We had the cash and don't regret it.

In theory our DC should all earn well. DC1 graduated last year and is already earning 40K - for some professions it's not that unusual.

When friends are moaning about student loans I always point them in the direction of Martin Lewis. Student loans shouldn't be a barrier to going to university. Unfortunately Ignorance about student loans is a barrier.

9% extra income tax is a big deal. If my tax went up that much for any reason I would not be happy.

My two are studying for law and probably medicine, touch wood. We will pay off as much as we can when they finish and/or we can see that they will be getting welll-paid work.

Does anyone know what percentage of students actually do not take the loans ( i.e. family or someone pays for it?) I suspect very small.

I think Needmore's post is interesting. If you can afford it then , obviously , it benefits your child in not having to pay the extra tax , but it does leave ( however small) more left in the pot. And this " And if Martin Lewis suggests individuals are better off taking loans, it implies there is a subsidy. "

My DS was talking to a visiting student to his university from the US and this student said words to the effect of - you don't know how lucky you are with the current system we have compared to the US . ( I realise there are nuances to their system i.e. university in the same state or a different one , but he genuinely thought it was by and large a better deal in the UK. Happy to be proven wrong. 3rd hand anecdotal.

Having a large outstanding student loan can affect your ability to get a mortgage too as some of my friends children have found out.

It's not 9% extra tax though Abra1d. It is a tax on the amount of money you earn above £21K

Not many youngsters earn enough for that to make a difference. Then later, as they might begin to (as climb up career path) that could co-incide with a time in your life wen you might want to work PT whilst dc are little. Or you might go without income when you set up a new business, or, of course unfortunately sometimes illness or accident prevent you working. No other loan stops just because you aren't earning enough.

Precisely. So the old fashioned gal who goes to Oxford in the hope of meeting the right sort of boy and marrying well, should take a loan.

No longer happens? Who knows. I certainly know a few well educated women my age who have not had to have careers. Similarly a physio friend working at a local teaching hospital tells me they seem to pick up a few medics each year whose main priority seems to be marrying a doctor.

Yes there are winners. Losers will be both high earners who are paying a high interest rate, and ordinary tax payers, many of whom won't have had the chance to go to university.

Basil, I tghought it was very few (my older 3 graduated without loans but even their friends whose parents had millions usually took loans and stuck them in an ISA) but in fact this year my twins say loads of boys in their class will not be taking loans out in September at all so I suspect just as the rules changed so many parents are also coming over to my view.

As NQ commercial lawyers in London do indeed start on £40k ish and earn a lot it was clearly right my daughters didn't take loans (now earning between £80 - £120k) (and helpful I have always worked full time so could ensure they graduated debt free) and I will take the hit for the twins too even though there is a risk they won't earn as much as I think debt psychologically does you down. We are not a family for having debts if we can help it other than a mortgage and 9% is massive if you also have a London mortgage to pay and £24k a year childcare costs per child at a London nursery etc.

It's not 9% extra tax though Abra1d. It is a tax on the amount of money you earn above £21K

Well,yes, but it is still an extra tax of 9% on that amount and £21K is a low floor that may not be indexed.

If 9% extra tax on income over 21k is not a lot, then why is there is much opposition to any increase in tax, even an extra 1% on income over 40k or 50k?

Countries in Europe that offer free higher education have marginal tax rates of 50-60% to pay for it (and other public services).

Clearly, whether the '9% tax on earnings above £21k' is much, or not, will depend on what you are earning above that.
I'm thinking more average wage than MN wages - you know, what the many get, not the few.

I just paid off my outstanding student loan having received some inheritance. It will give me an extra £115 a month in my pay packet, and if I'd kept paying off by PAYE it would have taken another 4 years mínimum. The money could have sat in savings instead but I'd prefer to have the additional income and know it's paid off. I still have enough savings for a rainy day after paying it and it feels like a nice way to use some of my inheritance, essentially towards my education. I suspect if I get any pay rise this year it will be minimal so by paying off my student loan I have given myself a little boost anyway.

My jaw is on the floor reading this thread. I think the majority of parents cannot afford to pay off a student loan or pay for university up front.

Most undergraduates take out a student loan because that is the only way they can afford university, not through choice.

And not all graduates are doctors and lawyers with massive salaries.

Just to say after 6 years of study and 2 years of additional training doctors do not end up with massive salaries.
Martin Lewis really irritates me talking about student loans - why on earth does he think 6% interest is acceptable?

Just to say after 6 years of study and 2 years of additional training doctors do not end up with massive salaries

Most Doctors take only 5 years to qualify and can then start getting a reasonable wage. I know a couple of medics who are just starting F2 (they are 24) who are getting just over 40K each in a cheap area too. It's not 'massive' but it's not bad either. 🤷🏻‍♀️

If jaws are dropping use that as an opporutnity to consider future career and children's career options because some of us do earn high salaries and there is nothing special about us - we just aimed high.

Unless it's a subject you love and have a passionate interest in and go into knowing salaries might not be great, why would you go to university and not intend to earn a better than average salary?

The average salary is 26k so you can earn above average but still not earn 'enough' to break even on your student loan.

Totally agree with pp about Martin looking on a personal level. There's nothing wrong with that per say but who knows what's going to happen to all these unpaid loans in the future.

They will be compensated for by the 'overpayment' of the high earners, won't they? It's a graduate tax really.

No, There's not enough high earners to compensate for all the other students who won't pay it off. And if you are a high earner then you'll stop paying at some point so the 'tax' no longer applies.

There are very, very few graduates who will start their careers on 40k.

I know on MN nearly everyone's DC start on that. But it really is quite rare in the real world.

Also grads have to bear in mind nobody knows how government may change the terms in future - of existing loans, for example by not raising the £21k pay back threshold in line with inflation.

Though perhaps the direction of travel is now against making the terms more onerous - even if as we know lab is not planning to write off the debt, the election has I think changed the climate for the moment, so that governments won't want to make the terms less favourable.

In the most junior hospital trainee post of Foundation year 1 your basic starting salary is £22,636. This increases in Foundation year 2 to £28,076. If you're a doctor in specialist training your basic starting salary is £30,002.