Should I pay off the student loan early?

[olympicfan]

DC has just graduated and the student loan already has 6k worth of interest added. (Borrowed 46k, now owes 52k). The current interest rate is 7.8%! They have got a job that starts on 35k but will be earning 50k in 2 years time. The job comes with accommodation so they will not be thinking about buying a house for about 5 years.

I had an inheritance and have also saved for DC so can afford to pay off their student loan before any more interest is added. Is this a good idea or madness? They are likely to be a high earner, but not city-lawyer type money.

@AllThePotatoesAreSinging you are right plan type, along with initial size of loan and salary mean that different choices will make financial sense for different families.

However the key shift is that no one should look solely at the size of the increasing loan. Instead the decision should be taken on basis of what will actually be paid in the remaining period before it's written off,

So in a situation like yours you might pay another £30k until it's written off so if loan remaining less than that you might indeed be better to clear it (assuming you continue to work until 65). If loan more than that , better just to keep paying.

@AllThePotatoesAreSinging apologies for picking out your example! I know you understood point - was expanding more for benefit of others because system is so confusing and doesn't operate like a normal "debt"

Happy for you to use 😊

Ok, so I have just used a student loan repayment calculator.

On an initial debt of 46k, DC will pay back 84.5k over 30 years and have the remaining 155k written off.

155k!!! Wow, compound interest is scary!

I am worryingly ignorant about student finance, and have a DC in lower sixth.
A repayment of £84.5K on a loan of £46K still seems a lot. If we can manage it (and it’s not clear to me right now if that’s the case), it seems best to pay fees and costs so DC does not need to take a loan at all. Or even just part of the costs so the loan is minimal.
I think - or am I missing something?

You have to look at what that figure represents in today's money also. So 85k over 30 years is actually less than the 52k lump sum you are planning to pay in the value of that money today adjusted for inflation. It’s still good value for money to drip feed it based on this information.

I went as far as paying off £100 to the SLC in his first term to make sure I could make the payment easily and set it up for future for overpayments.

It is really complicated to fathom.

After much debate I have decided to give my DS a lump sum and let him make the decision. He is doing a medical degree and will come out with 60+k debt but the true cost of his degree to the taxpayer is near 200k (so I’ve read). Also, looking at the cost of a medical degree abroad (in comparison to the UK)he’s still getting good value for money even if he does end up paying back 150k.

He may decide it’s not for him and be a travel vlogger. I have no idea.

I personally would not pay it off myself after reading all the information however, it’s about giving him the choice in my mind. This resolves me of my own feelings of guilt which, are mine to live with. It’s hard to explain. If I was a millionaire I’d pay it off. However, I’m unlikely to ever be a millionaire so the plan is DC will get 100k when we downsize (after he graduates) and he will have to make the choice what to do with it.

Currently he has 15k in savings and could pay off his first year but he is choosing not to. He’s an adult. He’s got to start making the hard decisions adults have to make throughout their lives.

What does your DS want to do?

I have a high earning DD who has paid hers off. At 30. Other DD doesn’t earn much and has paid next to nothing. If DD2 becomes a mum at any stage , she will pay nothing much. In effect she owes £0. She just owes the monthly amount taken as grad tax.

The new system is going to disadvantage lower earners. Paying off for much longer. High earners can clear it and pay for a much shorter period. DD1 paid from age 25 as did 4 year degree and 3 years training. Thats good if you can do it but Martin Lewis definitely thinks lower earners are now disadvantaged with the new loans.

LiterallyOnFire we are lucky enough to be able to help with housing too.
Bear in mind ML never highlights the disparity between the genders of who pays what back. Male students are far more likely on average to end up paying their loans back, as females over the lifespan tend to earn less due to time out for pregnancy, child rearing and caring responsibilities and going part time. Worth mulling over if you have boys. The stats never distinguish that.

It looks at earnings though which can be reduced for women as you say. Lower earnings equals lower repayment or none at all. However most 22 year olds have no idea if they will have dc and many higher earning ones will keep working and earning.

Very few women take long career breaks now. I pay £340 a month in student loan repayments. Still got 23 years left to pay; mine gets written off when I am 65 years old. If I had nursery fees to pay as well, I would have next to no disposable income.

I would absolutely pay it off OP. I never bought into the MSE's advice when I first read it. Whether you call it a 'loan' or a 'tax' makes no difference to the sums if you lay out all the scenarios on a spreadsheet over 40 years (or is it 30 in the case of OP?). I did a spreadsheet a while back and concluded for DD that whichever way we cut it, unless she is expected to be earning below £25k (and Government may change the rules in the future), it would be better to pay it off ASAP.

Plenty of women work part time and stay under the repayments threshold. That’s not remotely unusual. The advice totally depends on the loan you have and what else you could do with the money. Or if you have loads of money! The ML advice is mostly geared to average people in average jobs. Most simply don’t pay it off at all (50%) and we, the taxpayer pays, which is why the government is lengthening the term and lowering the wages you need to earn to pay anything back. The longer term definitely makes if worse for average grads. However it’s not the case that most women carry on working full time after dc.

i m not sure how common it would be for women to stay under £25k over 40 years. Even so, there are cheaper ways to borrow money, IIRC the interest rate on student loan is inflation + 3%…I guess they have to fund all the admin and management jobs somehow, I guess that s why they don’t appear to want people to pay their loans off as someone mentioned up thread.

No regrets here about DC leaving University without debt.

DS has just completed seven years of post grad education and debts/interest would have been racking up. He aims to eb an academic so his earnings will presumably fall within that middle ground of not being super high, but not being low enough that he would never repay.

DD who is in her first year of being a junior doctor decided to save what would have been her student loan repayments. In fact because though she does not earn that much per hour, she works an awful lot of hours, she has been able to save even more and in a low cost area, and with the extra affordability from not having loan repayments, is in the process of buying a house. Her flatmate will move with her, and with that rent her mortgage payments will be below what she was paying in rent. If she has to move for a job/training she can rent the property out.

Not having student loans has given her a lot more freedom.

An American article but the points are still valid.
https://wapo.st/3wnb1EI

(hope the share works.)

Everyone who says it's a tax and not a loan I think are burying heads in sand. It's 7.8% interest and can go up at anytime. Equally, the government can lengthen the write off time or scrap it altogether. I've never paid for any of my children's education so far, all mainstream schools but I'm paying their uni fees. No way can I sit back and see them enter adulthood with debt while I can afford to support them. Very lucky position to be in and it will be my honour to give it to them. They will have a strict monthly budget for food etc as need to learn to budget but everything else I'll cover.

A bank loan you must pay off. An absolute must. A student loan might never be paid off because it depends on your income. Therefore they are entirely different. Entirely. Also uni funding depends partially on income from the loans. Therefore they are tied into uni finance.

Im not saying all women earn under £25,000 all the time but many part timers do. Yes, there might be wage inflation and average teacher and nurse salaries might go up to £50,000 plus under Labour, but paying a grad tax on £27,000 is not onerous. Obviously rich people have dc who never have loans and other dc live at home for free with no loan. Others simply don’t have the money. The vast majority obviously.

If we don’t have student contributions, we would need to close unis. Maybe fewer dc should go? No loan, no degree and no place at uni.

These days it's much less common not to pay it off than it used to be, because the repayment threshold is lower (in real terms, ie after allowing for inflation), the repayment period is longer and it's less likely for women to take long career breaks.

£25,000 is not a very high salary in a high cost area. In order to buy, even rent, young couples need two full salaries. And since marginal income is important and both for day to day living and in terms of mortgage affordability, you don’t want to be paying an additional “tax”.

Working part time is quite a luxury. Not something all women can afford, and even then it can be women whose lower incomes mean that employment needs to be wrapped round school hours or available cheap childcare. At the other end of the spectrum are women whose husbands earn so much that the salary is not needed, or those with inherited wealth. But in moral terms why are they letting the taxpayers subsidise them.

House buying depends on attitudes, and where you live. Neither of mine, despite being in their mid/late 20s, know where they will be in three years time, yet one, in a low cost area can buy in part as a form of investment (though she hopes she can get on a specialist training in the same area). The other is in a high cost area so can’t and would not want to. Any money saved as a deposit for him would have been eroded by inflation. Not having loans means more flexibility in the future.

‘A loan must be paid off’

Yes, student loans are different, but ‘not having to pay it off’ isn’t as good as it might sound. It means either not having to pay anything by staying under £25k earnings a year for 40 years - not realistic, unless you are very wealthy and don’t have to actually work for a living in the first place; or, paying 9% more tax for nearly the whole of your working life (40 years), which works out at waaay more than what you originally borrowed.

Do not! Save it for a housing deposit and/or emergency fund!

UK student loans aren’t like other loans, not just because they get written off after a period, but because they can’t demand repayments if you fall below a certain earning threshold. Whereas a mortgage lender doesn’t care if you just lost your job. So while paying it off means you don’t have the long term liability, it also means you’ve lost a cushion in case of serious financial need in the future.

It’s not 40 years for most grads but will be in the future and this changes what dc should consider. Also parents. Lots of DC do work part time for years when they have dc, doctors and many in nhs and teachers. Lots do it. For 10 years it will greatly reduce loan payments. For students starting in 22/23, the Government expected 27% to repay in full. This is precisely why the new loans are 40 years with a lower starting salary!

I've calculated at the end of the 4 year degree there would be 80k of debt, at even 5% interest that's going to soon rocket to over 100 even by the end of the degree. Imagine the mortgage you'd get with 80k of debt on the table. I have every confidence they'll earn over the 30k threshold and to be paying an extra 9% tax throughout their working life isn't something I'm prepared to do. I think we all try and justify our decisions but I've spoken to my wealth management advisor and I'm taking their advice.

Student loans are not taken into consideration for mortgage applications. You should change wealth management advisor.

I owe around 100k. I'll pay off approx 30k of that.