Student loan question

[theone8181]

Hi guys I recently finished my open uni degree (yay), and now I need to start paying back the loan ( ). I currently earn 39,000, however my pension is salary sacrifice so I believe the government only "sees" around 33k (I sacrifice 16%). On the new scheme this means I'll only repay something like 40 quid a month which obviously means it will take a long time to repay.
My question is am I daft for wanting to throw a bit of extra cash at it now and again? My current loan is about 14k (only did the equivalent of years 2 and 3), obviously the interest rates are quite high at the moment, and I've created an excel spreadsheet (cause I'm sad and like numbers), and it's going to be about 20 years if I don't overpay, assuming the interest rates stay high (bit of guesswork involved here).
We do normally get quarterly bonuses at work of maybe a few hundred a year so my thought was just to put that towards it to chip away at it. I'm thinking of it a bit like a mortgage so that compound interest makes a big difference. I think if I leave it the full time it's something like 10k in interest.
Annoyingly my boss has said I've got to jump through extra hoops to get a promotion and there's no payrise, which does make me think I've wasted my time.

 

[Bluecube]

How old are you?And what are your future prospects salary wise? I’d personally look to clear the loan asap as the interest on student loans is ridiculous.

 

[Zefan]

If the servicing of the interest on a debt is more expensive than the earnings one could make (net) through risk free investments, then it makes no sense to pay it down.


The complication arises when it's close, and you have to start comparing riskier investments to beat the interest saved, but it depends on timescale of the loan repayment. If it's going to be 10+ years even with maximum repayment you're more likely to have success beating it with risky investments.

:edit: oh lawd they're 6.25-7.3%?! I suppose it's not totally shocking given the base rate but oof, big big oof.

 

[theone8181]

Oh sorry for reference I'm 37, although I'm aiming to retire at 55 (or 57 if the government get involved).
^ right now it's 7.1% for me, which is high, but at least it's not on 40k like most of the full time students (and will likely be never paid off).

 

[dirtychinchilla]

Well worth using this: https://www.student-loan-calculator.co.uk/

 

[Clarkson]

Mine is over 50k and whilst now in a decently paid job the interest generated every month easily surpasses my contribution.

Honestly I'm probably just going to leave it and live with it as a 'graduate tax'. If I'm ever out of work or retire early and 'earn' under the threshold then I won't be paying to it anyway.

 

[kona786]

Mine is over 50k and whilst now in a decently paid job the interest generated every month easily surpasses my contribution.

Honestly I'm probably just going to leave it and live with it as a 'graduate tax'. If I'm ever out of work or retire early and 'earn' under the threshold then I won't be paying to it anyway.

I used hear the loans expire like something after 20 or 30 years. Was that a myth? I started paying mine back in 2008.

 

[Semple]

If the servicing of the interest on a debt is more expensive than the earnings one could make (net) through risk free investments, then it makes no sense to pay it down.


The complication arises when it's close, and you have to start comparing riskier investments to beat the interest saved, but it depends on timescale of the loan repayment. If it's going to be 10+ years even with maximum repayment you're more likely to have success beating it with risky investments.

:edit: oh lawd they're 6.25-7.3%?! I suppose it's not totally shocking given the base rate but oof, big big oof.

It also doesn't help that it moves around a lot. I'm on plan 1 so it's base rate+ 1%. The amount to pay off my loan in full invested in something fixed for say 6% for 2 years will likely net positive compared to paying off the loan. Especially if the base rate starts to drop soon.

 

[Semple]

I used hear the loans expire like something after 20 or 30 years. Was that a myth? I started paying mine back in 2008.

They do yes. Depending on which plan you're on. I think the newer plans the OP is on has a longer duration before being wiped. Based on his aspirations of retiring early it's likely he'll still be paying back the loan in retirement.

 

[theone8181]

They do yes. Depending on which plan you're on. I think the newer plans the OP is on has a longer duration before being wiped. Based on his aspirations of retiring early it's likely he'll still be paying back the loan in retirement.

Yea that's my worry. That website was useful, but I didn't see an option for what overpaying would do.

 

[HangTime]

If the servicing of the interest on a debt is more expensive than the earnings one could make (net) through risk free investments, then it makes no sense to pay it down.


The complication arises when it's close, and you have to start comparing riskier investments to beat the interest saved, but it depends on timescale of the loan repayment. If it's going to be 10+ years even with maximum repayment you're more likely to have success beating it with risky investments.

:edit: oh lawd they're 6.25-7.3%?! I suppose it's not totally shocking given the base rate but oof, big big oof.

Surely it is the other way round? If debt is more expensive than earnings on investment, it DOES make sense to pay it down. When I had my student loan, rates were really low as they were capped at the lowest of base rate + 1% and RPI or something like that. Most of the time it was not worth paying down.
Ironically, the gap is narrowing nowadays due to the interest on risk-free investments going up a lot. It used to be the case that (modern) student loans were significantly higher than the interest on basic cash investments, it was like 4.8% or something when base rate was still under 1%.

Student loans are a bit different from most debts however in that:

• Payments are based on income so you have the added 'security' of being able to repay less if your income is reduced. Therefore 'getting ahead of the game' by repaying more than you need to carries less benefit than say a mortgage (NB I'm not saying that means paying down SL debt isn't beneficial, just less beneficial)
• They get written off after X years so if you have a large loan and low income with no expectation of that changing significantly, the optimal strategy may be to let it expire.

Annoyingly my boss has said I've got to jump through extra hoops to get a promotion and there's no payrise, which does make me think I've wasted my time.

Whilst not directly tied to the subject line, we need to explore this more.
Firstly, when you say "wasted my time", do you mean that your intention was for your OU course to get you a pay rise with your current employer? Typically, I'd expect degree qualifications to be of more benefit when applying to a new employer, rather than your current one. I did a Masters degree with the OU and I didn't expect it to significantly improve my prospects at the employers I was with at the time. In other words, I wouldn't judge the value of your degree based on what your current boss has said to you about promotion prospects.
Secondly, a promotion with no pay rise doesn't sound much like a promotion to me, more a role change. That doesn't mean it's a bad move it it will give you valuable experience and open more doors in future, but if it's being badged as a promotion then I'd expect some form of financial reward.

 

[Disco_P]

Mine is over 50k and whilst now in a decently paid job the interest generated every month easily surpasses my contribution.

Honestly I'm probably just going to leave it and live with it as a 'graduate tax'. If I'm ever out of work or retire early and 'earn' under the threshold then I won't be paying to it anyway.

My loan is well over £100K and so it is simply a graduate tax until it expires. My first graduate job had me repaying £1 per month and it goes up by several hundred a month

 

[Semple]

Yea that's my worry. That website was useful, but I didn't see an option for what overpaying would do.

Overpaying would bring down the term and the capital amount so that the level of interest is also reduced. Unlike a mortgage there's no penalty for overpayments of any value.

The question everyone asks is whether it's worth overpaying versus saving it elsewhere.

The first part of that question is whether you're ever likely to repay it in full (not really an issue for you as your loan is small) but for some who might have 60-70k and with interest added on over 30 years could be up to like 100k. If based on earnings you're never going to pay it off then there's definitely no point overpaying.

Secondly as this isn't like a "normal" loan, you're usually better off servicing other debts first. I.e. no point paying more towards your student loan if you've got credit card debt at 40% interest.

Then you need to consider whether you'd earn more saving the excess versus how much interest the student loan incurrs. This one is very hard to work out because interest rates change, and the interest on the loan is calculated daily, so too many variables, but you can make a rough guess.

 

[Quartz]

Annoyingly my boss has said I've got to jump through extra hoops to get a promotion and there's no payrise, which does make me think I've wasted my time.

If your degree was work-related then it's time to look for a new job.

My question is am I daft for wanting to throw a bit of extra cash at it now and again?

Outstanding loans are generally bad. It seldom hurts to pay them off. But don't neglect things like your emergency fund.

 

[Zefan]

Surely it is the other way round?

Yep. Brain finger typey stuff went wibble.

 

[theone8181]

Just to update, my current role is a senior technician, but frankly I do engineer work anyway (which is what I want to be promoted too, but with a pay rise). I'm a bit annoyed that he said that, as other have had promotions and payrises (in other sections), and our department has had the biggest workload, with far more crap to deal with and pretty poor payrises (think I'm averaging about 3.5% for the last 2 years).
Getting back to the loan, the thought did cross my mind that I'd probably be better overpaying my mortgage rather than the loan as despite it being a much lower rate, its for a lot more (something boomers tend to forget ).

 

[HangTime]

Mortgage vs Student Loan is a tricky one. If you are currently on a low mortgage rate, when does that expire?

Ordinarily, I would advocate paying off the debt with the much higher rate, regardless of the size of loans. You'll end up with more money if you pay off your most expensive (highest rate) debts first. However, if you are on a fixed mortgage that will expire soon that could be a 'time bomb' in the sense that the rate will likely be a lot higher when the fixed term expires. So if there's a risk the mortgage rate could end up higher than the student loan rate you might want to try and reduce the amount owed.
Another factor is that if you lose your job you stop having to make student loan repayments which isn't the case for a mortgage. So student loan debt is very sustainable, it effectively just becomes a millstone that reduces earnings rather than a debt that must be serviced regardless.

 

[theone8181]

Mortgage vs Student Loan is a tricky one. If you are currently on a low mortgage rate, when does that expire?

Ordinarily, I would advocate paying off the debt with the much higher rate, regardless of the size of loans. You'll end up with more money if you pay off your most expensive (highest rate) debts first. However, if you are on a fixed mortgage that will expire soon that could be a 'time bomb' in the sense that the rate will likely be a lot higher when the fixed term expires. So if there's a risk the mortgage rate could end up higher than the student loan rate you might want to try and reduce the amount owed.
Another factor is that if you lose your job you stop having to make student loan repayments which isn't the case for a mortgage. So student loan debt is very sustainable, it effectively just becomes a millstone that reduces earnings rather than a debt that must be serviced regardless.

Fair points. I've got 120000 left, at 2.5% for another 5 years so a bit tricky to judge.

 

[HangTime]

Definitely don't overpay the mortgage if it is 2.5%, even if you don't pay off the student loan you'd likely be better off investing the money and keeping it to one side to pay off a lump sum when the mortgage term is up.

 

[Diagro]

Student loan isn't a traditional debt.
Doesn't show up on checks.

I treat it as additional tax.

So should everyone else imo.