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Should I repay my student loan early?

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It depends when you took your student loan

Student Loans have been around for 20 years and even though they are probably the most common loan that younger people have, they are arguable the most complicated when trying to figure out how the repayments will affect you, when you start repaying and whether you should pay it off early. The interest at which you repay your student loan, will depend on when you studied which in turn will determine whether you should repay your student loan early.

Check the loan APR

Student Loans are categorised into pre 1998 loans, 1998-2011 loans and post 2012 loans and each have differing interest rates and repayment terms. Anyone in higher education between 1990 and 1997 may have an older ‘mortgage style’ loan with an interest rate at present of 3.6%. You can start repaying it as soon as you want but earn over £27,813 and it is compulsory to start repayments.  The  amount is calculated like a 5 year loan, so if you owed £5000 that amount would be divided by 60 (months) and you would therefore repay around £83 a month. Unlike later student loans, the pre 1998 loans gives the responsibility of making the repayments to the individuals. You would need to set up a direct debit or send a cheque every month, directly to the Student Loans Company. Even though the loan isn’t included in your credit rating, if you miss or make a late payment, this can have a substantial effect on your credit score.

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For those who took out their student loan between 1998 and 2011, things are slightly different. The current interest rate is set according to the Bank of England’s base rate and is at present 1.5%. You start repayments as soon as you earn over £15,795 but only repay 9% of anything above that. So if you earn £17,000 you repay £109 a year. The money is repaid by your employers after being taken directly from your salary, but if they aren’t taking the repayments, it is your responsibility to let your employers know. There is no impact to your credit rating and if you are applying for credit, many lenders don’t consider student loans as ‘real debt’.

Loans taken out after 2012 have a higher interest rate of 6.6% which is based on inflation. However the amount you need to earn before having to repay is also increased to £21,000. You only pay 9% on anything over that, so earn £22,000 and you repay just £90 a year. As with the 1998 to 2011 loans, there is no impact on your credit rating and the money is taken from your salary and paid to the Student Loans Company. But if money isn’t being taken when it should, it is your responsibility to inform them.

Low interest rates mean cheap borrowing

The thing with most student loans is that they aren’t costing you to have them as the interest rates are so low. You only start to repay them once you are earning above a certain amount and the interest rates for pre 2011 loans are likely to be less than the inflation rate. Even if you are concerned by the low interest, think of it like this; if you borrowed £1000 to cover food bills over that period and the interest averaged 4%, that would mean if you repaid the loan after 10 years it would cost £1,480. However, the rate of inflation has also increased the cost of food, so to buy the same things now, it would cost you the same amount. Therefore, it hasn’t had any impact to your pocket.

Repayments can stop if your income drops

If your income drops below the threshold or you lose your job the repayments stop, unlike other lenders who will be chasing you, so it’s a debt you don’t have to worry about. Even if you never reach the earnings threshold for making repayments, the debt will be totally wiped after 25 years, so if you’re thinking about repaying early, you may just be throwing money away.

Pay high interest borrowing off first

The golden rule for repaying debt is to pay off that with the greater interest rate first. Credit cards or high interest loans should be your priority as they will undoubtedly be more than your student loan. As crazy as it sounds, even if you have no debt and savings, you may still be better keeping your savings rather than using them to repay your student loan. You may be paying 1.5% interest on your loan, but gaining 2.5% interest on your savings and therefore better off and while you may have no debt now, you may need money in the future. If you have used any savings to repay your loan, you may be forced to borrow money at a much higher interest rate which will cost you considerably more.

 

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About Rebecca Robinson

About Rebecca Robinson

After spending the last 8 years juggling life as a mum of two, wife and working full time as a Project Manager for a global telecommunications company, Rebecca Robinson made the decision to follow her love of writing and took the plunge; turning her passion into a full time career. Since becoming a full time writer, Rebecca has worked with various media and copy-writing companies and with the ability to make any topic relevant and interesting to the reader, now contributes to The Working Parent on articles ranging from credit cards to teenage relationships. Ever the optimist, Rebecca's dreams for the future include a house in the country filled with children, dogs and horses in the field!

Website: Rebecca Robinson

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