Should I Clear My Student Loan?
As an undergraduate, there was cheap food like tinned baked beans and late-night
kebabs, hundreds of drinks at the student bar. That is what the bulk of my student
loan was used to pay for. "I've earned it," I used to tell my parents. "Well, I
will have earned it in the future..."
And now? Guess what, the joke is on me. Each month, a great big slice of my salary
is automatically transferred to the Student Loans Company, even if it is the minimum
monthly payment. For five and a half years I have been repaying the cost of my student
bar bill and my junk food and at my present level, I estimate it will take another
two-and-a-half years of payments at least before I am debt free.
Is it worth me paying it off early? Currently, I am managing to save a small amount
month and pay a small sum towards my pension. Would it be of more benefit to use
this money to wipe out my student debt, instead?
The question is difficult to answer. On the plus side, the rate of interest on student
loans has fallen considerably from 4.8 per cent last August to its present level
of only 2.5 per cent. The downside is that savings rates have also dropped dramatically.
In short, this means that for basic rate taxpayers who hold this type of account
it would be better to save rather than pay off their student loan, higher rate taxpayers,
on the other hand, would be worse off.
Put another way, there is a good chance the student loan rate will do down even
further this year, and remain low during the next 18 months, which means less interest
to pay.
Does this mean that it is no longer the best policy to pay off your debt as soon
as possible? For most debts, a quick repayment is always the best policy but student
loans are a-typical.
Firstly, and most importantly, the debt will not become a burden if you stop earning.
You have to earn more than $25,000 a year before the Student Loans Company will
deduct any money from you. The amount you pay depends upon your income. Furthermore,
if the debt has not been paid off by the time you reach 65, it will be canceled.
The same is true if you die.
That is why, at the moment at least, it may be better to put your money towards
other financial priorities.