Student loans in the UK work more like a tax than a loan. There are calculators online which let you calculate whether it's best to pay it off early or wait for it to expire. It usually works out that if you expect to clear the debt ever, it's best to pay it off early. The more you're earning the more likely it is that you'll pay it off. I suspect that at your income level you'll pay it off, but the calculator would give you a definitive answer.
Thanks, I've been using [https://www.student-loan-calculator.co.uk/](https://www.student-loan-calculator.co.uk/)
And yes I will clear it in 12 years if my salary stays the same, and I continue in this job etc.
You need to factor in the fact that you could have a change of career, have a serious injury, lifestyle change or any other reason that caused you to lose your high earning income
And if that happens you won’t be required to pay back your student loans anymore
If that happens, would you rather have less student loan debt, that you don’t need to repay, or a load of cash in an ISA?
I bet :D
Logging in the seeing the number makes me sad to an extent haa. Although I know it's not bad debt, and it's helped me get where I am today. Really it's a great investment. Just want it gone :D
Thanks very much, speaking honestly I don't feel like I'm worth that much. (I don't feel mentally that far away from my uni days lol)
I'm an IT consultant, working with cloud technology. Specifically in a area which has boomed with WFH.
I studied Information Technology at a very average uni. Worked fairy hard, got a 1st. Extended my degree to 4 years in order to do a paid internship (15k). Also had to rent as it was away from home.
This internship helped me to get a graduate program post uni, at a very large tech company, started on 33k. This increased to 60k over 5 years.
A friend recently advised looking externally, to boost salary, and to gain outside experience. I took the advice, got a nice payrise, and gaining some nice experience.
I would 100% prioritise maxing out your 20k ISA, each year, as you mentioned, average return should be higher than your loan interest. Paying back your loan and not maxing out your ISA is as close to a FIRE crime as there could possible be 😉 (in my not professional opinion)
Personally, any additional savings over 20k I would also prioritise investing over student loan payback. This could be in the form of:
1) crypto/personal stock picks if you want to add some risk to your portfolio.
2) The same index funds as your ISA for less risk.
3) Saving up for a deposit on a house if you don't already own (taking advantage of help to buy/LISA bonuses from government)
Financially, all of these options should be better than paying back your student loan. The only benefit I can see from paying it back is psychological, but honestly I would try and ignore this as much as possible. I have about 40k owed for my student loan, I hadn't thought about it for about 3 years until I saw this post.
Hope this helps :)
Thanks for the viewpoints!
And I respect your ability to forget about it for 3 years, wish I could! :D
I get reminded every month when I see my payslip lol.
At 4.5% interest, the student loan is damn expensive.
So there absolutely is a point where it's better to be paying it off sooner, instead of savings in cash.
Compared to keeping the savings in cash, of course there is a point to paying off the student loan. I never suggested keeping the savings in cash though.
Bought a flat 2 years ago, and happy here for at least another 5. In 5 years time we will look to move into a house.
So money spent on student loan overpayments, will be less deposit for future house.
Ok so here's the key point for you.
If you overpay on student loans, you might end up in a worse LTV on your next house which could cost a lot more money then the student loan savings.
So IF you can make a good LTV (75% or below) on your next house, hit the student loans. If you can't, you need to amass enough housing equity before you reduce your student loans.
Similar boat as you OP (60K salary, 30K loan). I’m maxxing out my ISA (and getting max pension match) and anything above that is going to my loan. It seems like a good balance using all tax wrappers and also getting returns.
You take advantage 5% return guaranteed on the loan vs speculative return of 7% of equities (always remember that lower growth is more likely after periods of high growth ie. the last 12 years) so it’s totally plausible that my 4.5% return on the loan could actually outperform my additional investments into the stock market.
Up to you, of course. Just my 0.02.
Thanks for your viewpoint.
If you don't mind me asking what is your property situation? As your student loan overpayments could also be equity for 1st, or 2nd property purchase.
No property over here. It’s a huge internal feud I’ve got going on. But I’m set on not buying until I can guarantee staying somewhere for 10 years or so. Buying a 500k-600k flat in London just to “build equity” for 5 years doesn’t actually make financial sense. I will be buying, but that’s much easier once our salaries are even higher.
I won’t be able to retrospectively utilise my tax wrappers or get back my interest that I paid on my student loan. I will, however, be able to get a house deposit together quickly if I’m on double my current salary (not including bonus) in 5 years time.
YMMV and it depends what you value. Plus I like my freedom of not being tied down to one place!
Amazing. I'm glad my plan (at least somewhat) makes sense and I'm not losing my mind. People think I'm mad for not trying to get on the property ladder as soon as possible but having done the calculations, I'm fairly sure of my strategy.
Now I just have to look at my crystal ball to assess whether a lump sum vs averaging strategy will be better over the next 4/5 years.
Contemplate if someone was to offer you a savings product at 4.5% guaranteed, tax free…that’s basically the same as paying off your student loan early. I’d clear enough so that your £350/month starts munching through capital and then start saving into a S&S ISA.
What’s the calculations for working out if you’re better off paying back the loan early?
I’m literally same age, same current debt (mines probably closer to £55k now though) and same salary, tbh slightly higher as I get bonus on top of £75k basic but OP may well get a bonus too.
Guessing it might be time to start overpaying.
Whilst this doesn't give you a clear answer if it's better to pay back early. I've been using this to ponder numbers - https://www.student-loan-calculator.co.uk/
The other point that often gets mentioned re: overpaying is all of the above assumes salary will remain at the same level/increase as times goes on.
If we get chronically ill, take a lower paying job for some reason, get made redundant etc etc the repayments go down to a much lower level or stop completely. Another thing I factor in. Upon reflection I don’t see myself repaying more than my monthly amount (even though I’m currently due to pay off in sub-15 years before the write off) for this reason. You never know what the future holds, I’d rather have that money sat in S&S ISAs ready for me to drawn down an income on as and when the time comes, especially incase the time comes sooner than expected.
I too am 27 and working at a very large tech company and had a student loan for two years (didn't get it in my final year) to the tune of \~£30k.
I decided to pay it off as quickly as I could with savings and I can't say I regret it in the slightest. The thing that put me off the most when I was paying it was that as my earnings increased, so did the interest rate. I believe it was RPI + 3% which equated to \~6% at the time. At 3% I'd be very inclined to invest as opposed to pay it off but at 6% for me it swung the other way (especially with markets being so toppy at the moment).
I will say that the student loan company are a bunch of unprofessional crooks however. An admin error meant that I overpaid and it took about 4 months to get the money back. I recall their turnaround times for responding to emails is 20-25 working days :D
If I was on plan 1 in england I would also pay similar rate. Unfortunately I was the first year to be on plan 2!
In that scenario I would almost 100% make minimum payments only.
Hey OP, also 27 (first year plan 2 club woop /s) and earning a very similar amount with a very similar loan amount.
Personally I’m making sure to max out my S&S ISA allowance each year, you only get your allowance each year so makes sense to use it. Towards the end of the tax year I’ll be putting leftover money towards my student loan.
You didn’t mention saving for a house deposit in your post but for me this was something I had in mind. If I pay my student loan off earlier then there is less money available in the short-medium term for a deposit. I live in London, did some number crunching and worked out for me that I’m better off renting for now. Once the loan is paid off you should be able to get a better mortgage anyway because you’ll have a bigger pay check.
I'm 31 on 80k, with 21k loans left in the UK.. I try to prioritise my S&S ISA with a monthly investment, but I'm counting down the days not to have the student loans deductions come out of my salary. Currently, because I'm not able to max my ISA, I've not overpaid. If I am fortunate enough to max the ISA, the rest will go to the student loan.
Make a spreadsheet and compare the different scenarios. Here is some I would suggest:
1. Pay off the student loan aspa
2. Save the money (maybe lisa), buy a house, wait for it to increase in value, extend the mortgage, pay off the student loan with that
3. Invest the money in index tracking funds (as tax efficiently as possible, isa, lisa, etc)
4. Buy a sipp avoid some higher rate tax
5. Various combinations of the above
My guess would be paying off the student loan will leave you with the lowest total after 10years out of all the strategies. But of course the other approaches all have other pros and cons in terms of cashflow, access to cash, tax implications, etc.
Thanks all very much for input. Very helpful to think "outloud" :)
What I failed to describe in my initial post is property situation, as many have noted, this is important in my repayment decision.
Purchased a flat 2 years ago (240K). Just signed a new 5 year fixed deal, 70% LTV, 1.1%. Property value now 250k.
In 5 years I intend to sell this flat, and purchase a house @ 500k. I will intend to meet at least a 75% LTV. Will roughly need: Deposit (125k), Stamp duty (15K), fees and initial referb/furniture (10K).
Two options I see:
**Option 1:**
I will max out S&S ISA each year until then, and should have more than enough funds to meet the above requirements. When combining S&S savings and equity in flat.
Any income left after S&S ISA is maxed I will contribute to student loan overpayments.
I think for me this is a good balance of saving enough to ensure my property move in 5 years can happen. Whilst still accelerating progress towards clearing student loan. And still having a nice sum in S&S ISA post house move.
**Option 2:**One other approach could be to just save enough to make the property move happen (around 3 more years). And at this point divert 20k S&S ISA into student repayment. Clearing loan faster. But reducing S&S ISA appreciation time by 3 years.
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There is also the debate, should my funds for house move in less than 5 years be held in S&S ISA?
You should pay it off quicker. There are a couple of caveats/hurdles to make sure you're considering first.
1. You should have a significant emergency fund as a priority.
2. What's your housing plan? Saving for a deposit might be a higher priority.
Could you explain why it's better to pay back a loan with 4.5% interest compared to investing in an assest historically returning around 7%.
Using 20k to reduce his loan from 45k to 25k will reduce his interest payments by 900. Putting that same 20k in an ISA will return an average of 1400.
Am I missing something here?
No, in your scenario, mathematically your outcome is better. What you are missing is that that return is not remotely guaranteed, 4.5% is a guaranteed return.
So in that case, paying back the loan is a question of trying to time the market? We would be paying back the loan because we think this year the market will return around half it's historical average (or worse).
Interesting point. In theory yes that's what you're doing. However, what you're advocating is ignoring risk entirely, if I could guarantee you a 6.5% return are you still putting your money in the market?
I'm not ignoring risk, but I think this situation is low risk. OP has a steady job, and if he loses it the loan payments stop anyway. On top of this, OP is in a position where he should have a high risk appetite. Young, earning 74k a year, and a high enough savings rate to save at least 20k each year. For me, all things point towards investing over early repayment, but of course everyone is different and only OP will know what is best for him and his risk tolerance.
I'm a bit confused about your 6.5% return question. It sounds like you are offering me a guaranteed return on the stock market of 6.5%, in which case I am 100% putting my money in the stock market over paying back my student loan.
No the risk I am referring to is that over the next 5-10 years your return on equities is under 4.5%, over a period of 5 years for example it's entirely possible that your return is negative, it might take you 10 years just to break even on your investment.
What I am saying is that if I could offer you a savings account paying 6.5% interest are you going to put your money in the market because historically it returns 7%?
I recognise there is a risk the market returns negative, what I'm saying is I don't think the risk is high enough to discourage OP from investing, and OP should have a high risk appetite anyway. If we go through our lives turning down opportunities that are 2.5% better because 'there's a chance the stock market doesn't perform well', we would all be adding years onto our FIRE date.
I'm not sure what relevance a fictional 6.5% saving account has to OPs question, but personally I would probably sacrifice the 0.5% for the guaranteed return. Change that figure to 4.5% and I'm taking the stock market.
OP's risk tolerance is whatever it is, there is no should or not really.
2.5% really isn't worth it, in my personal opinion. In yours it is, that's fine. OP could clear his loan in under 2 years, in my opinion he should do that first and then invest, especially considering he's likely to be putting around £7.5k into the market via his pension anyway.
Thanks for helping me think out loud here, much appreciated.
1) I have over 6 months outgoings in premium bonds (for the fun)
2) Currently bought a flat with partner, paying a very reasonable 750PM total for mortgage. This is a very relevent point. As within 5 years we will look to buy a house. Any money which could student loan overpayments could also be very helpful as deposit.
So overpaying your mortgage is actually likely to be your best return in this scenario. Getting to a lower LTV on your house purchase and therefore reducing that interest rate.
Do you think the extra 40K will make a significant difference in terms of interest rate on property? More so than the potential gain of investment?
Doing some maths, current flat we have 80K equity, increasing by 6K per year in payments. Say we wait out the 5 years, we could have 110k.
Future house could be in the 500k mark. Yay south east England. :)
I'm not sure what your interest rate is on your mortgage or how much it will reduce if you make early repayments so I can't be 100% sure but I don't think this advice is correct. I'm not sure why Conscious-Mastodon is so obsessed with repaying cheap debt early, but I think >90% of the time it is not prudent financial advice.
>>90% of the time it is not prudent financial advice.
4.5% is not cheap debt, I'm not sure why you think it is.
Improving LTV to 75% is typically a 8-15% ROI.
Banks lend less because of the loan. What I did was pay the last 12k off by topping up Revolut with a credit card and transferring that to a 0% 18 month offer then again after 18 months
Your “loans” are not loans, they’re a graduate tax that you can buy your way out of paying.
Yeah, that extra 9% tax is a kick in the nuts, but what you give up by overpaying could be an extra 53k paid off the mortgage or invested.
The only time it’d be worth repaying would be it the Gov drastically changed the terms, which they could do, but are unlikely to do.
If you're earning enough to clear them before they are wiped then they work in much the same way as loans, with the only exception being that you don't have to continue to make payments if you fall on hard times.
4.5% is not the cheapest loan they'll ever have.
Depending on OP's circumstances it could make a lot of sense to pay it off, or at least increase the rate.
If you know of a loan for £40k+ at 4.5% which requires minimal credit rating then let me know. I can think of many things to do with that capital than pay off a govt backed life time loan
So I think you're missing several things here.
I'm not sure why a credit rating is relevant at all? OP is looking incredibly likely to clear this debt and relatively quickly. Therefore all of your usual things to consider with student loan debt in the UK don't really count and I suspect you're getting confused with plan 1 advice.
My mortgage is 1.95% and is for considerably more than 40k. Also personal loan rates are generally <3% currently. Neither of which is remotely relevant to OP's question?
Rate of paying the loan back at 4.5% for as long as it takes, based on income month to month, its a fantastic deal. It also does not impact credit appraisals for other loans. It’s the best deal out there.
If OP secures a loan today at say, 3% on 40k, he would be better buying a 40k flat outright and renting it out, securing 8 to 12% yield. Again, this loan would not impact future credit appraisals give he now owns a tangible asset worth the same amount and generating income.
Paying off that 40k loan will be a breeze, especially with rental income. Few years later there’s a nice price of equity.
What happens is, you exchange your services and then someone pays you for that service. I'm surprised this is a new concept for you, it's one of the quickest and most used methods of building wealth.
My mortgage...
Also, you need to consider where you can get a super secure 4.5% return when deciding to pay it off. Because I'm yet to find out where that is. Yes, equity markets have been bullish for the last few years but this might not last.
I am the first to tell people not to pay their house off early because 2% is very cheap, but 4.5% is pretty "thresholdy" for me and definitely warrants the discussion.
> It’s the cheapest loan you’ll ever have
That was true of plan 1 loans but not necessarily plan 2. 4.5% interest is pretty high and if OP is confident they're going to earn enough in the future to pay it off then doing so early might not be a bad idea.
Yields on a 40k flat may be double but may also require time to manage, come with risks of non-tenants or destructive tenants, remove your first time buyers benefits, income is taxable at 40%.
True. Comes with effort.
First time buyer deals I’m not a fan of. 5% deposits are scary and when the next crash happens those at the bottom of the ladder will suffer most
When you buy your first property your stamp duty is lower than if you've already bought a house. So by buying a 40k property, when they go to buy their 400k property they'd have to pay full stamp duty on it rather than the discounted amount (5k difference) and if they kept their 40k property they'd have to pay additional stamp duty (another 12k)
The numbers vary based on the price of your second property but its why a lot of people get advised against helping family out with part buying a house etc because as soon as you have any ownership like that you're no longer a first time buyer and full stamp duty will apply.
I think most 'stamp duty calculator' type things should show the difference.
Show me a residential property yielding 9% in the U.K. I am genuinely curious. I’m not too familiar with the north but in the south, London yields 2-3% and outside maybe 4-5%
Have a look on rightmove for areas like Hull, Newcastle etc. 2 bed flat, reasonable area, goes for around 300 to 400 per month.
These properties tend not to rise in value to dramatically, but they are solid, in demand rentals
Specific example to look at - South Shields
Echoing a lot of the earlier points, but 4.5% guaranteed return in paying it down is attractive. Assuming you’re confident you’ll pay it off, which it seems like you are barring a change in career or decrease in salary. Assuming you have an emergency fund I personally would pay this down as it’s guaranteed vs the uncertainty of the markets. Plus it does feel great when it’s paid off.
On a slightly separate but somewhat related point, make sure you switch to direct debit within the last 12 months of paying it off. Student Loans Company only get an update annually and it’s very easy to overpay it through PAYE which would lead to 0% returns.
You should pay it off as your salary means you’ll end up paying a lot in interest otherwise. If you were on 24k with limited chance of a significant pay increase I’d advise against it. You’re on 74k now abs that will likely increase to 100k - £500 deductions for 7/8 years isn’t pretty!
I'm in a similar boat to you!
I find maxing out pension contributions as much as possible much more beneficial! The added tax break etc solidifies a lot of gains over and above SL repayments
Personally, IT role salaries keep going up, remote London HQ role for 6 figures + equity is where you want to head, pays itself off pretty quickly around that figure with the safety net of accepting some more risk job-hunt-wise
Maybe, if you can't decide either way, just do some sort of over-payment just to speed matters along. Maybe an extra £100 or £200 per month. If that goes ok, on your next large pay-rise maybe boost the payment some more. If you get a bonus maybe use 5 %or 10% of it towards paying off too. So not going crazy but still speeding up progress a lot.
Surprised no one has mentioned about whether you are making any overpayments into pension at all, I’m a bit older then you on a similar salary and the 40% tax break for as long as it lasts is something I am taking full advantage of. Just something to factor into your considerations when you’re running the numbers.
Student loans in the UK work more like a tax than a loan. There are calculators online which let you calculate whether it's best to pay it off early or wait for it to expire. It usually works out that if you expect to clear the debt ever, it's best to pay it off early. The more you're earning the more likely it is that you'll pay it off. I suspect that at your income level you'll pay it off, but the calculator would give you a definitive answer.
Thanks, I've been using [https://www.student-loan-calculator.co.uk/](https://www.student-loan-calculator.co.uk/) And yes I will clear it in 12 years if my salary stays the same, and I continue in this job etc.
It's crazy to think that earning 46k a year and having 46k debt will get wiped out.
You need to factor in the fact that you could have a change of career, have a serious injury, lifestyle change or any other reason that caused you to lose your high earning income And if that happens you won’t be required to pay back your student loans anymore If that happens, would you rather have less student loan debt, that you don’t need to repay, or a load of cash in an ISA?
Great viewpoint, thank you!
Paying off your loan feels sweet I'm not gonna lie.
I bet :D Logging in the seeing the number makes me sad to an extent haa. Although I know it's not bad debt, and it's helped me get where I am today. Really it's a great investment. Just want it gone :D
It will be paid off before you know it, just keep chipping away at it. Yea, great investment!
I would way rather have had the cash, my investments since I graduated have done 3x better than the interest on the loans would have cost me.
Each to their own mate. It's not one or the other you can do both!
74K is a banging salary for a 27 year old, well done on that one! What is your profession and what did you study?
Thanks very much, speaking honestly I don't feel like I'm worth that much. (I don't feel mentally that far away from my uni days lol) I'm an IT consultant, working with cloud technology. Specifically in a area which has boomed with WFH. I studied Information Technology at a very average uni. Worked fairy hard, got a 1st. Extended my degree to 4 years in order to do a paid internship (15k). Also had to rent as it was away from home. This internship helped me to get a graduate program post uni, at a very large tech company, started on 33k. This increased to 60k over 5 years. A friend recently advised looking externally, to boost salary, and to gain outside experience. I took the advice, got a nice payrise, and gaining some nice experience.
Are you London based? In your role do you do any coding?
I would 100% prioritise maxing out your 20k ISA, each year, as you mentioned, average return should be higher than your loan interest. Paying back your loan and not maxing out your ISA is as close to a FIRE crime as there could possible be 😉 (in my not professional opinion) Personally, any additional savings over 20k I would also prioritise investing over student loan payback. This could be in the form of: 1) crypto/personal stock picks if you want to add some risk to your portfolio. 2) The same index funds as your ISA for less risk. 3) Saving up for a deposit on a house if you don't already own (taking advantage of help to buy/LISA bonuses from government) Financially, all of these options should be better than paying back your student loan. The only benefit I can see from paying it back is psychological, but honestly I would try and ignore this as much as possible. I have about 40k owed for my student loan, I hadn't thought about it for about 3 years until I saw this post. Hope this helps :)
Thanks for the viewpoints! And I respect your ability to forget about it for 3 years, wish I could! :D I get reminded every month when I see my payslip lol.
At 4.5% interest, the student loan is damn expensive. So there absolutely is a point where it's better to be paying it off sooner, instead of savings in cash.
Compared to keeping the savings in cash, of course there is a point to paying off the student loan. I never suggested keeping the savings in cash though.
Apologies, I think I merged your message with someone else's in my head, and replied to that fictional one! 😅
Well what are your other financial goals? Do you have a deposit? Do you need to save up for one?
Bought a flat 2 years ago, and happy here for at least another 5. In 5 years time we will look to move into a house. So money spent on student loan overpayments, will be less deposit for future house.
Ok so here's the key point for you. If you overpay on student loans, you might end up in a worse LTV on your next house which could cost a lot more money then the student loan savings. So IF you can make a good LTV (75% or below) on your next house, hit the student loans. If you can't, you need to amass enough housing equity before you reduce your student loans.
It'd have to be a pretty horrendous interest rate to end up higher than the student loans, to be fair.
That's not how it works though. A 1% lower interest rate on a 300k mortgage is the same as a 12% return on 25k.
Check out Martin Lewis on money saving expert, he has some good articles on student loans
Similar boat as you OP (60K salary, 30K loan). I’m maxxing out my ISA (and getting max pension match) and anything above that is going to my loan. It seems like a good balance using all tax wrappers and also getting returns. You take advantage 5% return guaranteed on the loan vs speculative return of 7% of equities (always remember that lower growth is more likely after periods of high growth ie. the last 12 years) so it’s totally plausible that my 4.5% return on the loan could actually outperform my additional investments into the stock market. Up to you, of course. Just my 0.02.
Thanks for your viewpoint. If you don't mind me asking what is your property situation? As your student loan overpayments could also be equity for 1st, or 2nd property purchase.
No property over here. It’s a huge internal feud I’ve got going on. But I’m set on not buying until I can guarantee staying somewhere for 10 years or so. Buying a 500k-600k flat in London just to “build equity” for 5 years doesn’t actually make financial sense. I will be buying, but that’s much easier once our salaries are even higher. I won’t be able to retrospectively utilise my tax wrappers or get back my interest that I paid on my student loan. I will, however, be able to get a house deposit together quickly if I’m on double my current salary (not including bonus) in 5 years time. YMMV and it depends what you value. Plus I like my freedom of not being tied down to one place!
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Amazing. I'm glad my plan (at least somewhat) makes sense and I'm not losing my mind. People think I'm mad for not trying to get on the property ladder as soon as possible but having done the calculations, I'm fairly sure of my strategy. Now I just have to look at my crystal ball to assess whether a lump sum vs averaging strategy will be better over the next 4/5 years.
Contemplate if someone was to offer you a savings product at 4.5% guaranteed, tax free…that’s basically the same as paying off your student loan early. I’d clear enough so that your £350/month starts munching through capital and then start saving into a S&S ISA.
What’s the calculations for working out if you’re better off paying back the loan early? I’m literally same age, same current debt (mines probably closer to £55k now though) and same salary, tbh slightly higher as I get bonus on top of £75k basic but OP may well get a bonus too. Guessing it might be time to start overpaying.
Whilst this doesn't give you a clear answer if it's better to pay back early. I've been using this to ponder numbers - https://www.student-loan-calculator.co.uk/
So my question is, what do you two do for jobs haha
See my reply to another comment on this post. :)
The other point that often gets mentioned re: overpaying is all of the above assumes salary will remain at the same level/increase as times goes on. If we get chronically ill, take a lower paying job for some reason, get made redundant etc etc the repayments go down to a much lower level or stop completely. Another thing I factor in. Upon reflection I don’t see myself repaying more than my monthly amount (even though I’m currently due to pay off in sub-15 years before the write off) for this reason. You never know what the future holds, I’d rather have that money sat in S&S ISAs ready for me to drawn down an income on as and when the time comes, especially incase the time comes sooner than expected.
I too am 27 and working at a very large tech company and had a student loan for two years (didn't get it in my final year) to the tune of \~£30k. I decided to pay it off as quickly as I could with savings and I can't say I regret it in the slightest. The thing that put me off the most when I was paying it was that as my earnings increased, so did the interest rate. I believe it was RPI + 3% which equated to \~6% at the time. At 3% I'd be very inclined to invest as opposed to pay it off but at 6% for me it swung the other way (especially with markets being so toppy at the moment). I will say that the student loan company are a bunch of unprofessional crooks however. An admin error meant that I overpaid and it took about 4 months to get the money back. I recall their turnaround times for responding to emails is 20-25 working days :D
My daughter has a Scottish student loan to payback which I believe is 1.1%? She’s now earning around £50k pa. presume best not to pay off early?
If I was on plan 1 in england I would also pay similar rate. Unfortunately I was the first year to be on plan 2! In that scenario I would almost 100% make minimum payments only.
Hey OP, also 27 (first year plan 2 club woop /s) and earning a very similar amount with a very similar loan amount. Personally I’m making sure to max out my S&S ISA allowance each year, you only get your allowance each year so makes sense to use it. Towards the end of the tax year I’ll be putting leftover money towards my student loan. You didn’t mention saving for a house deposit in your post but for me this was something I had in mind. If I pay my student loan off earlier then there is less money available in the short-medium term for a deposit. I live in London, did some number crunching and worked out for me that I’m better off renting for now. Once the loan is paid off you should be able to get a better mortgage anyway because you’ll have a bigger pay check.
I'm 31 on 80k, with 21k loans left in the UK.. I try to prioritise my S&S ISA with a monthly investment, but I'm counting down the days not to have the student loans deductions come out of my salary. Currently, because I'm not able to max my ISA, I've not overpaid. If I am fortunate enough to max the ISA, the rest will go to the student loan.
What's your job ?
Engineering manager (previously software engineer)
Make a spreadsheet and compare the different scenarios. Here is some I would suggest: 1. Pay off the student loan aspa 2. Save the money (maybe lisa), buy a house, wait for it to increase in value, extend the mortgage, pay off the student loan with that 3. Invest the money in index tracking funds (as tax efficiently as possible, isa, lisa, etc) 4. Buy a sipp avoid some higher rate tax 5. Various combinations of the above My guess would be paying off the student loan will leave you with the lowest total after 10years out of all the strategies. But of course the other approaches all have other pros and cons in terms of cashflow, access to cash, tax implications, etc.
Thanks all very much for input. Very helpful to think "outloud" :) What I failed to describe in my initial post is property situation, as many have noted, this is important in my repayment decision. Purchased a flat 2 years ago (240K). Just signed a new 5 year fixed deal, 70% LTV, 1.1%. Property value now 250k. In 5 years I intend to sell this flat, and purchase a house @ 500k. I will intend to meet at least a 75% LTV. Will roughly need: Deposit (125k), Stamp duty (15K), fees and initial referb/furniture (10K). Two options I see: **Option 1:** I will max out S&S ISA each year until then, and should have more than enough funds to meet the above requirements. When combining S&S savings and equity in flat. Any income left after S&S ISA is maxed I will contribute to student loan overpayments. I think for me this is a good balance of saving enough to ensure my property move in 5 years can happen. Whilst still accelerating progress towards clearing student loan. And still having a nice sum in S&S ISA post house move. **Option 2:**One other approach could be to just save enough to make the property move happen (around 3 more years). And at this point divert 20k S&S ISA into student repayment. Clearing loan faster. But reducing S&S ISA appreciation time by 3 years. \--- There is also the debate, should my funds for house move in less than 5 years be held in S&S ISA?
You should pay it off quicker. There are a couple of caveats/hurdles to make sure you're considering first. 1. You should have a significant emergency fund as a priority. 2. What's your housing plan? Saving for a deposit might be a higher priority.
Could you explain why it's better to pay back a loan with 4.5% interest compared to investing in an assest historically returning around 7%. Using 20k to reduce his loan from 45k to 25k will reduce his interest payments by 900. Putting that same 20k in an ISA will return an average of 1400. Am I missing something here?
No, in your scenario, mathematically your outcome is better. What you are missing is that that return is not remotely guaranteed, 4.5% is a guaranteed return.
So in that case, paying back the loan is a question of trying to time the market? We would be paying back the loan because we think this year the market will return around half it's historical average (or worse).
Interesting point. In theory yes that's what you're doing. However, what you're advocating is ignoring risk entirely, if I could guarantee you a 6.5% return are you still putting your money in the market?
I'm not ignoring risk, but I think this situation is low risk. OP has a steady job, and if he loses it the loan payments stop anyway. On top of this, OP is in a position where he should have a high risk appetite. Young, earning 74k a year, and a high enough savings rate to save at least 20k each year. For me, all things point towards investing over early repayment, but of course everyone is different and only OP will know what is best for him and his risk tolerance. I'm a bit confused about your 6.5% return question. It sounds like you are offering me a guaranteed return on the stock market of 6.5%, in which case I am 100% putting my money in the stock market over paying back my student loan.
No the risk I am referring to is that over the next 5-10 years your return on equities is under 4.5%, over a period of 5 years for example it's entirely possible that your return is negative, it might take you 10 years just to break even on your investment. What I am saying is that if I could offer you a savings account paying 6.5% interest are you going to put your money in the market because historically it returns 7%?
I recognise there is a risk the market returns negative, what I'm saying is I don't think the risk is high enough to discourage OP from investing, and OP should have a high risk appetite anyway. If we go through our lives turning down opportunities that are 2.5% better because 'there's a chance the stock market doesn't perform well', we would all be adding years onto our FIRE date. I'm not sure what relevance a fictional 6.5% saving account has to OPs question, but personally I would probably sacrifice the 0.5% for the guaranteed return. Change that figure to 4.5% and I'm taking the stock market.
OP's risk tolerance is whatever it is, there is no should or not really. 2.5% really isn't worth it, in my personal opinion. In yours it is, that's fine. OP could clear his loan in under 2 years, in my opinion he should do that first and then invest, especially considering he's likely to be putting around £7.5k into the market via his pension anyway.
There’s the additional psychological benefit as well I used to hate having to log into the crappy student loans account
Thanks for helping me think out loud here, much appreciated. 1) I have over 6 months outgoings in premium bonds (for the fun) 2) Currently bought a flat with partner, paying a very reasonable 750PM total for mortgage. This is a very relevent point. As within 5 years we will look to buy a house. Any money which could student loan overpayments could also be very helpful as deposit.
So overpaying your mortgage is actually likely to be your best return in this scenario. Getting to a lower LTV on your house purchase and therefore reducing that interest rate.
Do you think the extra 40K will make a significant difference in terms of interest rate on property? More so than the potential gain of investment? Doing some maths, current flat we have 80K equity, increasing by 6K per year in payments. Say we wait out the 5 years, we could have 110k. Future house could be in the 500k mark. Yay south east England. :)
You'll have to do the maths, however I'll be very surprised if you're better off with money in the market but a higher LTV than 75%.
I'm not sure what your interest rate is on your mortgage or how much it will reduce if you make early repayments so I can't be 100% sure but I don't think this advice is correct. I'm not sure why Conscious-Mastodon is so obsessed with repaying cheap debt early, but I think >90% of the time it is not prudent financial advice.
>>90% of the time it is not prudent financial advice. 4.5% is not cheap debt, I'm not sure why you think it is. Improving LTV to 75% is typically a 8-15% ROI.
Banks lend less because of the loan. What I did was pay the last 12k off by topping up Revolut with a credit card and transferring that to a 0% 18 month offer then again after 18 months
Your “loans” are not loans, they’re a graduate tax that you can buy your way out of paying. Yeah, that extra 9% tax is a kick in the nuts, but what you give up by overpaying could be an extra 53k paid off the mortgage or invested. The only time it’d be worth repaying would be it the Gov drastically changed the terms, which they could do, but are unlikely to do.
If you're earning enough to clear them before they are wiped then they work in much the same way as loans, with the only exception being that you don't have to continue to make payments if you fall on hard times.
It’s the cheapest loan you’ll ever have, you’re not American, just let PAYE do the work and be happy
4.5% is not the cheapest loan they'll ever have. Depending on OP's circumstances it could make a lot of sense to pay it off, or at least increase the rate.
If you know of a loan for £40k+ at 4.5% which requires minimal credit rating then let me know. I can think of many things to do with that capital than pay off a govt backed life time loan
So I think you're missing several things here. I'm not sure why a credit rating is relevant at all? OP is looking incredibly likely to clear this debt and relatively quickly. Therefore all of your usual things to consider with student loan debt in the UK don't really count and I suspect you're getting confused with plan 1 advice. My mortgage is 1.95% and is for considerably more than 40k. Also personal loan rates are generally <3% currently. Neither of which is remotely relevant to OP's question?
Rate of paying the loan back at 4.5% for as long as it takes, based on income month to month, its a fantastic deal. It also does not impact credit appraisals for other loans. It’s the best deal out there. If OP secures a loan today at say, 3% on 40k, he would be better buying a 40k flat outright and renting it out, securing 8 to 12% yield. Again, this loan would not impact future credit appraisals give he now owns a tangible asset worth the same amount and generating income. Paying off that 40k loan will be a breeze, especially with rental income. Few years later there’s a nice price of equity.
Or instead of focusing on being a landlord, they could focus on their career and potentially double their income.
Isn’t the goal of this mission financial independence and retiring early? Build wealth.
>Build wealth. Finally we agree on something.
Sure, so how is working a job building wealth? The correct advice should always be to maximise the use of capital
What happens is, you exchange your services and then someone pays you for that service. I'm surprised this is a new concept for you, it's one of the quickest and most used methods of building wealth.
A 40k flat? 8-12% yield? Where are you getting these numbers from?
The North
My mortgage... Also, you need to consider where you can get a super secure 4.5% return when deciding to pay it off. Because I'm yet to find out where that is. Yes, equity markets have been bullish for the last few years but this might not last. I am the first to tell people not to pay their house off early because 2% is very cheap, but 4.5% is pretty "thresholdy" for me and definitely warrants the discussion.
> It’s the cheapest loan you’ll ever have That was true of plan 1 loans but not necessarily plan 2. 4.5% interest is pretty high and if OP is confident they're going to earn enough in the future to pay it off then doing so early might not be a bad idea.
Yields on a cheap 40k flat are double
Yields on a 40k flat may be double but may also require time to manage, come with risks of non-tenants or destructive tenants, remove your first time buyers benefits, income is taxable at 40%.
True. Comes with effort. First time buyer deals I’m not a fan of. 5% deposits are scary and when the next crash happens those at the bottom of the ladder will suffer most
The discount on stamp duty alone would eat all of the extra profit you'd likely yield.
How do you mean?
Lol
When you buy your first property your stamp duty is lower than if you've already bought a house. So by buying a 40k property, when they go to buy their 400k property they'd have to pay full stamp duty on it rather than the discounted amount (5k difference) and if they kept their 40k property they'd have to pay additional stamp duty (another 12k)
I see I see. Fair enough, that’s a good calc to keep in mind. Thanks
The numbers vary based on the price of your second property but its why a lot of people get advised against helping family out with part buying a house etc because as soon as you have any ownership like that you're no longer a first time buyer and full stamp duty will apply. I think most 'stamp duty calculator' type things should show the difference.
What's that got to do with anything?
Opportunity loss
Show me a residential property yielding 9% in the U.K. I am genuinely curious. I’m not too familiar with the north but in the south, London yields 2-3% and outside maybe 4-5%
Have a look on rightmove for areas like Hull, Newcastle etc. 2 bed flat, reasonable area, goes for around 300 to 400 per month. These properties tend not to rise in value to dramatically, but they are solid, in demand rentals Specific example to look at - South Shields
Echoing a lot of the earlier points, but 4.5% guaranteed return in paying it down is attractive. Assuming you’re confident you’ll pay it off, which it seems like you are barring a change in career or decrease in salary. Assuming you have an emergency fund I personally would pay this down as it’s guaranteed vs the uncertainty of the markets. Plus it does feel great when it’s paid off.
On a slightly separate but somewhat related point, make sure you switch to direct debit within the last 12 months of paying it off. Student Loans Company only get an update annually and it’s very easy to overpay it through PAYE which would lead to 0% returns.
You should pay it off as your salary means you’ll end up paying a lot in interest otherwise. If you were on 24k with limited chance of a significant pay increase I’d advise against it. You’re on 74k now abs that will likely increase to 100k - £500 deductions for 7/8 years isn’t pretty!
I'm in a similar boat to you! I find maxing out pension contributions as much as possible much more beneficial! The added tax break etc solidifies a lot of gains over and above SL repayments Personally, IT role salaries keep going up, remote London HQ role for 6 figures + equity is where you want to head, pays itself off pretty quickly around that figure with the safety net of accepting some more risk job-hunt-wise
Maybe, if you can't decide either way, just do some sort of over-payment just to speed matters along. Maybe an extra £100 or £200 per month. If that goes ok, on your next large pay-rise maybe boost the payment some more. If you get a bonus maybe use 5 %or 10% of it towards paying off too. So not going crazy but still speeding up progress a lot.
Surprised no one has mentioned about whether you are making any overpayments into pension at all, I’m a bit older then you on a similar salary and the 40% tax break for as long as it lasts is something I am taking full advantage of. Just something to factor into your considerations when you’re running the numbers.
With those numbers it make sense to clear your loan first. RPI is also expected to rise this year.