Wednesday, 10 November 2010

Student Loans ...what does it mean to me?

Now that I have graduated I am now facing the daunting task of paying off my Student Loan, so I thought it was about time I learn more about the financing behind them and how best I go about paying them off, while at the same time talk about the problems facing new Students.

Student Loans themselves are provided by the Student Loans Company (SLC) and if like me and you went to university after 1998 you will be paying back via your salary at 9% above the 15,000 base rate by a system known as Income-Contingent Repayment (ICR).

Now to simplify the equations I have based what I owe to be £25,000 which isn't too far from the truth ...4 years at around 1.3k Tuition, 4.5k maintenance loan and interest for paying back I will base my workings on a graduate earning £25,000 which is around the average

So first off how & when will I start repaying my loan...

Like most people I will have deductions made out of my wage via the PAYE system, these deductions are 9% of the gross wage above 15,000 so lets work this out...

25,000 / 12 = £2,083 per month

...which equates to £833 per month above the threshold (£15,000 / 12 = £1,250)

All this means that 9% of this is £74.97 a month in repayments (£899.64 a year)

So I know how much I will be repaying, now the fun with interest rates begins

Is Student Loan repayments a stealth tax?

This question is much like that of nation insurance contributions, you get something out of it but you must pay. The only way is to earn below the £15,000 threshold.

Well what is the definition of tax?

'charge against a citizen's person or property or activity for the support of government.'

So a compulsory 9% contribution, although you get something tangible from it - your degree, it still sounds understandable as a tax.

Is the Student Loan good value

Have a quick look at the Student Loans website page on the interest rates that occur on the loans, currently they are at 1.5%, now what does that mean to me?
  • Well currently UK inflation is at just over 3% meaning that in terms of real world spending power, the deficit caused by your student loan is decreasing at 1.5% a year.
  • This is well below virtually any other loan you could get your hands on - usually in the region of 7-11% currently
  • Most importantly - The repayment interest rates for student loans currently and historically have been lower than even a modest savings account.
Saving money by paying off your Student Loan

Like any loan it is wise to pay it off as soon as possible, thus incurring the minimum amount of interest possible, however as I pointed out with student loans having such a low interest rate, is it always best to proactively be directly reducing the size of the loan?

What do I mean - to illustrate this I will talk about what happens if I have £250 extra a month that I could use to pay off part of my student loan.

The £250 a month equates to a healthy £3,250 a year, if this is paid towards your student loan directly you will save an additional £48.75 in interest per year at the current 1.5%. ...however if you placed this in a regular savers account at 5% (4% net) you will earn £130, thus making you £81.25 a year extra.

...So the moral of the tail is

Don't directly pay off your Student Loan early, pay the minimum repayments and save the rest!

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