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.

Absolute rubbish. Your mortgage allowance is based on your amount of available income and any loans, including student loans are taken in to consideration.

I can't get my head around not paying it all upfront, if I can. Sure no-one knows the future, but to regret earning more than 25k seems a stumbling block. What about inheritance? Is that included as income?

Incorrect. Of course net income is taken into account, but the amount of outstanding loan is irrelevant. It could be £20k or £200k, it makes no difference. Your “imagine the impact of an £80k loan” statement is misleading.

I get what you're saying but I'd still rather pay it off. While I'm here I have control to support him where I can.

I think you need to be careful here - you and the posters need to clarify what countries they are all in/ the student loan debt is in. The UK system is very different to the USA or the Australian systems, for example.

I am not sure on the latest UK student loan advice, but when I took mine I was told you basically ignore it, and anything you don't pay will just be written off after the time period is up - the risk is basically on the government regarding whether it gets paid back or not. However, them upping the terms and repayment rates on recent years, not to mention the cost of the degree itself, the goalposts have changed a little.

@Lakelandmumofthree my apologies, I just re-read my posts and my tone was awful. Lesson to self - don’t post on MN when having a real life argument. Sorry.

Me too, stressful time x

What anyone “owes” is besides the point. It’s monthly payments that matter. Obviously some posters haven’t grasped that the average starting salary for a grad in 2022 was under £25,000. That means 50% were paying £0 back on day 1. Clearly that should change but many lower paying grad jobs don’t see job holders paying off very much. It’s pointless looking at the sum “owed”. Dc don’t owe 1p if they don’t earn the minimum.

As someone who is still paying back their student loan on a payment 1 plan. I totally would. The rates for my loan are pretty reasonable but unless he gets a fabulous job those interest rates are awful. And it just eats away at you all the time and affects everything you do. Let’s face it, his mortgage rates will probably never be that high and the compound interest rate is phenomenal.

That's exactly what I'm trying to avoid for him, that feeling at the back of your mind that you carry around. I'm a worry pants and I know unless I pay I'll carry it around too. In a perfect world we'd all be able to do this for our children but the costs are so ridiculous it's impossible a lot of the time.

I’ve found information online about student loans to be very opaque… when looking into it originally (Feb 2023), there was info on a govt website that compared the different plans, and I am sure that it said that the new plan (for those starting Sept 2023) would not have interest rates capped (and when we were looking in Fen 2023, RPI was something like 13.5 per cent), compared to previous plans, which seemed to have interest rates capped at about 6 or 7 per cent. However, this web page is no longer there, and I can’t find this information.
That is a massive change - that now your student loan interest could be at times 13.5per cent. And interest is added the day that you get your first student loan payment. At high inflation / student loan interest rates, the amount ‘owed’ will increase incredibly quickly, especially as you are not making any of the interest payments for the first few years anyway. I think the biggest risk is for those who start off on a standard graduate salary (I expect that will prob be over the threshold in a few years anyway), and whose salaries take a while to increase. But if when aged 40 or 50, salary has increased significantly, then a 9 per cent ‘tax’ on salary over the threshold would be a lot, for the 20 years left before loan repayments cease (eg at £80k salary, paying approx £6k a year in student loan repayments for a further 20 years would be £120k, and that’s assuming the salary doesn’t go up even higher (which it will, even with a less-than-inflation rise). The info I read online in Feb 2023, suggested that the projection was that only 12 per cent of people would pay off the loan in full.

But I don’t think it should be viewed as ‘free money’, as ‘not paying it off in full’ does not mean that you will only pay off a proportion of the original £56k loan.. it is just likely to mean that the amount owed has accumulated so much (and so quickly) that the standard payments just wouldn’t typically be enough to pay it down. Meaning that it is just an additional tax burden of 9 per cent (above threshold) for 40 years.

I'd save the money for them to get on the housing ladder in five years time when needed. It's highly h likely they'll be able to save a similar sum in five years.

I doubt that very much. You must be on a very good salary to pay 340 a month back.

You'd think they could at least make it tax deductable. It's calculated on gross salary and taken from net so I can believe it!

Decisions on this depend partly on which scheme or plan the loan is on - arrangements have changed significantly over the years. Originally these loans were meant to be at interest rates close to zero. The most recent plan is at interest rates of approx 7% and is not now written off for forty years ( previously I think it was 30). Under these rules the loan keeps going up and up and remains as a cost to you for forty years of your working life ( previously if written off after 30 years you had a few years left before retirement to divert the money usually paid as this ‘tax’ into your retirement funds or something. Now that has been removed)
Get some proper advice to work things through. Be cautious because there are other choices eg house deposits etc but also don’t just accept the rather simplistic advice that it’s never worth paying off. Let’s face it, the loan repayments reduce your money for other things and we know there’s a cost of living crisis.

Also, it’s amazing that it’s hardly mentioned that nowadays with the cost of living crisis and the high tax burden, graduates are generally paying an extra 9% tax ( over a threshold) and the latest plans seem designed to ensure that this is permanent for forty years ( helped by the high interest rates meaning the sum owed keeps growing because the repayments aren’t high enough to bring it down - unless you have an extremely high salary or you have or inherit capital sums to pay in) . I understand that graduates benefit from their education and it needs to be paid for somehow, but this doesn’t really seem fair to me.

The issue with house deposits is first you have no idea what DC will do. They may stay in post graduate education for a long time, like mine, so see the value of the deposit eroded by inflation. They might have mobile careers, drop out of University, have a short lived marriage and lose half the house in a divorce. They may settle in a low cost area, where they really don’t need to be given a deposit, or in a high cost area where property remains unaffordable.

Not having to make loan repayments is personal and permanent and allows greater flexibility. We found we needed every penny at that point when children are young, childcare is expensive and your mortgage is high. Losing 8% each moth would have made it impossible.

Long long ago I was given the good advice of never investing in financial products I did not understand. Endowment mortgages, fancy pensions etc. To me car leasing, mobile phone contracts and student loans are complicated. I try to pay at the time, and then know I where I stand. So we helped DD with their first phone and car, but then expect her to save what she would have spent on repayments to buy the next. (In practice it means she has had the car for 6 years and the phone for almost as long.) However those savings plus not having to repay loans, has meant that she does have a house deposit in a low cost area, and because her disposable income is higher, her affordability is higher so she can borrow more.

I would add the caveat that we are lucky in that we are in a position to not have to put things on the never-never, and some students will have to take out loans. But if you have a choice, even if I did understand the figures, I would want DC to avoid debt.

This! My sentiments exactly. I don't have a single loan, if I can't afford it I don't get it. Mortgage obviously different. My son will earn his own house deposit, at 18 he's still a dependent to me and I want to support him financially, at 22 with a career it's different.

Definitely not, you will have to pay the full interest anyway. And likely they won’t pay it off anyway. Give them the money for a property deposit, much more beneficial. It’s not comparable to a bank loan. I never give mine a second thought

@Lakelandmumofthree You hope for this. Many DC at 22 don’t get the career or earnings they expect. Look at the average starting salary for grads!! It clearly tells you some have not gained anything much. How do you save on £25,000 pa? Or even £30,000 if you pay rent? It’s very difficult unless you live at home and all stats are saying dc are buying homes much later than they used to.

If parents can afford to pay all uni costs or DC can pay off loans, they are somewhat immune from cost of living issues. They have plenty of money which is not needed for the electricity or gas bill! Fact.

@Peonies12 what do you mean by "you will have to pay the full interest anyway"? If you pay off the loan, the interest will stop accumulating.

I don't get what you mean? If there's no loan, there's no interest?

Minimum wage equates to £21k a year, god help him if after 5 years of a degree he wouldn't meet the threshold to pay it back of £25k!!! Get more than that in Aldi.

At that rate of earnings, I would definitely pay it off.

Ehh?

DD did not start working until she was 25, by which time her debt would have already started racking up. She made the deliberate decision to save what others were paying in student loan repayments. As it turns out she is doing loads of overtime so more money and less time to spend, which added to the savings. In her case she lives in a very low cost area, where monthly rent is less than half what she might be paying in London.

The point is everyone's circumstances are different, and when DC start University you don't know where they will end up or what they will be earning. Average is only an average. In three years time DS could be anywhere in the world. UK student loans would make things complicated and perhaps cause problems with a credit rating.

It was a stretch for us to pay school fees, but we did, in part because we lived in an area where available state provision was challenged, so it seemed sensible to just carry on. We had no great desire to join a golf club or buy a new car. Others will have the money but feel that taking out loans will encourage their DC to be more financially responsible. Each to their own. I know that DC are surprisingly appreciative of the fact that they don't have to make loan repayments. This for us is worth not being able to afford cruises or whatever. Everyone has their own attitudes to debt, and what they want to spend their money on.