So, this student loan, right...

Dinomania · 7 Jan 2011 at 17:27

...I'm not one of those who will take out one of the whopping £9k loans, thankfully!

Mine hails from 2002-06 and this year, 2010-11. So not too bad. And only rise with inflation, IIRC.

Now, I understand the conventional wisdom that it's the cheapest loan I'll ever get - and on the presumption I will some day take out a mortgage, it's just not worth paying back a really cheap loan only to struggle to build a deposit and then pull out a more expensive one further down the line.

BUT how does this change if for some reason I never do get a mortgage? I presume then, that it's worth paying it back?

The Halk · 7 Jan 2011 at 17:33

If/when you apply for a mortgage it isn't considered as secured or unsecured lending, but the monthly payment to it would be considered to be an outgoing as far as affordability is concerned.

You're best off saving as much as you can and putting off paying off the student loan as long as you can if you want to get a mortgage ASAP.

bsoltan · 7 Jan 2011 at 17:39

There is no need to pay it off. Just wait until your regular payments pay it off.

That's what I'm doing.

You are better off putting the money you would use to pay it off in a savings account as the interest should be higher than the interest on your loan so you're making money from the loan.

fini · 7 Jan 2011 at 17:40

Indeed. Even if we say you'll never ask to be a loaned a penny again in your life you'll still get a better rate sticking what you do have in ISAs and other forms of saving than you'll save by paying off your student loan early.

Barzini · 7 Jan 2011 at 17:44

Yeah I would never advise to pay off the student loan early, unless you had money to burn. Just let the regular payments take care of it, interest rates are low right now anyway so it wont be going up much.

Kemik · 7 Jan 2011 at 17:45

While the interest charged is less than the interest you gain from saving the money you should save. Consider inflation though. If inflation is higher than your saving rate, spend it aka pay back the loan.

[TW]Fox · 7 Jan 2011 at 18:03

Kemik said:
If inflation is higher than your saving rate, spend it aka pay back the loan.

Surely this is wrong - the only time you should pay it back is when the interest rate on the loan is higher than inflation? If it's lower than inflation the amount you owe before repayments is REDUCING in real terms.

My opinion is that you should simply ignore it - let it get taken care of at point of salary and forget about it.

Kemik · 7 Jan 2011 at 18:05

[TW]Fox;18168800 said:
Surely this is wrong - the only time you should pay it back is when the interest rate on the loan is higher than inflation? If it's lower than inflation the amount you owe before repayments is REDUCING in real terms.

My opinion is that you should simply ignore it - let it get taken care of at point of salary and forget about it.

They always set the interest rate of the loan at, or above inflation.

Dinomania · 7 Jan 2011 at 18:13

Well inflation as of Nov 2010 was either 3.3% (CPI) or 4.5% (RPI), so let's say about 4%.

My ISA is only getting 1.75%. National interest rate set by the Bank of England is 0.5%, isn't it?

So my student loan (which is linked to inflation, so should stay the same in real terms) is growing rather faster than any savings I have are growing.

I realise it's never really going to hurt me - but on the premise I /never/ take out another loan, surely I'm simply losing money to it?

[TW]Fox · 7 Jan 2011 at 18:15

Kemik said:
They always set the interest rate of the loan at, or above inflation.

Once a year, in April. So it's entirely possible for inflation to be higher than the loan interest rate.

The Halk · 7 Jan 2011 at 18:17

Inflation doesn't matter at all.

If the savings rate you can obtain after tax is better than the interest rate you are being charged then you don't pay it back. Also don't pay it back if you may need the money for a deposit, and that's why Sara shouldn't pay it back now.

Inflation has no bearing at all on this particular opportunity cost.

Dinomania · 7 Jan 2011 at 18:18

Also - saying that I'm not losing out 'in real terms' kindof presumes that I am getting payrises in line with inflation. In my last job, pay was frozen, and now I'm in teacher training, I'm not getting paid at all..

Kemik · 7 Jan 2011 at 18:19

The Halk said:
Inflation doesn't matter at all.

If the savings rate you can obtain after tax is better than the interest rate you are being charged then you don't pay it back. Also don't pay it back if you may need the money for a deposit, and that's why Sara shouldn't pay it back now.

Inflation has no bearing at all on this particular opportunity cost.

So you'd rather they left it in a bank account, losing real value of money, than pay back a loan that is growing each day?

Dinomania · 7 Jan 2011 at 18:19

The Halk said:
Inflation doesn't matter at all.

If the savings rate you can obtain after tax is better than the interest rate you are being charged then you don't pay it back. Also don't pay it back if you may need the money for a deposit, and that's why Sara shouldn't pay it back now.

Inflation has no bearing at all on this particular opportunity cost.

Well actually, my main question was:

sara said:
BUT how does this change if for some reason I never do get a mortgage? I presume then, that it's worth paying it back?

And given that my loan certainly is growing faster than my savings, it looks like maybe I should pay it back. Or at least throw some lumps at it.

[TW]Fox · 7 Jan 2011 at 18:21

What are your projected earnings? You may find it ends up getting written off anyway!

The Halk · 7 Jan 2011 at 18:21

Kemik said:
So you'd rather they left it in a bank account, losing real value of money, than pay back a loan that is growing each day?

Why is that the choice?

It's better to put it into the best interest bearing account she can find than a current account.

In 2 years time when she's scraping for a deposit and she wishes she had that 4K she paid off her loan....

Finally you can't have it both ways. If it's losing real value in a bank account (after interest) then it's doing the same on her student loan account (after interest)

[TW]Fox · 7 Jan 2011 at 18:22

Kemik said:
So you'd rather they left it in a bank account, losing real value of money, than pay back a loan that is growing each day?

His point is that if the money you have is earning more in interest than the value of the loan, its better to keep it, irrespective of the inflation rate. Because what exactly are you 'saving' if you spend money on it which would otherwise earn more interest elsewhere?

The inflation issue is a red herring.

The Halk · 7 Jan 2011 at 18:23

sara said:
Well actually, my main question was:

And given that my loan certainly is growing faster than my savings, it looks like maybe I should pay it back. Or at least throw some lumps at it.

If you're never going to get a mortgage then pay it back ASAP.

Don't piddle around with switching savings accounts trying to get more interest, it's not time well spent, and there's pitfalls.

I read it as ever get a mortgage not never get a mortgage

bsoltan · 7 Jan 2011 at 18:24

http://www.moneysavingexpert.com/loans/student-loans-repay

Current Interest rate? 1.5%, provided the Bank of England Base Rate remains at 0.5%. If there's movement it'll track this plus 1% point, up to a maximum rate of 4.4% in total. So in a year a £10,000 balance will accrue £150 worth of interest, if it stays at 1.5%. See the Interest Rates guide.

Last year's interest rate? 0%. So if no repayments were made, the outstanding balance on 1 September 2009 would've been the same figure on 31 August 2010.

Quite simply for post-98 loan holders, the interest you can earn in a top Cash ISA or Savings Account outstrips the cost of student loans, especially for basic rate tax payers. So you're better off saving any excess cash you've got rather than repaying the debt.

Dinomania · 7 Jan 2011 at 18:26

I'll be going into teaching - starting salary is only just over £20k. Might vary up to £30k starting if I go private.