Every Monday in our Money blog we get an expert to answer your Money Problems. Today’s question is from Ellie, who asks…
“My outstanding student loan balance is around £5k and I’m repaying it with a 4.3% interest rate. I can’t decide whether it would be better to pay it all off in one go, or leave the money in a savings account. Can you help? I have also overpaid so am technically due for a refund of £300 – but should I withdraw that money?”
I first established with you that paying off your remaining student loan would not wipe out your savings, because ensuring you have an emergency fund is really important, whatever stage you are at. The recommendation is to have the equivalent of three months’ worth of essential outgoings to fall back on.
I then consulted Save The Student (STS), to see if we could figure out what your options are.
They needed a few more details and we worked out that because you are on Plan 1 and graduated in 2013 (and thus started repaying your loan in April 2014) your loan would get written off after 25 years, in 2039.
If you’re ever unsure what your repayment terms are, you can find them here…
Tom Allingham, student money expert at STS, says: “It’s an age-old question, and there isn’t one set answer that applies to everyone. But for me, the big thing to consider is how likely you are to repay your loan in full before it’s cancelled.
“As someone with a Plan 1 Student Loan, you’re already more likely to clear your balance than others as the repayment threshold has always been the lowest, and the debt won’t have accrued as much interest as on other plans.”
He pointed out that you have a relatively small amount of debt remaining and over half your repayment term left to go. Without knowing your salary, he can’t say for certain if you will repay your debt in full, but the general consensus is that if you are earning in the high £20,000s you will repay your loan before 2039. This means clearing it early could end up saving you interest you would otherwise be paying.
But if you are earning less than £30,000 it may be worth reconsidering – and even claiming the refund you are due.
Tom from Save The Student says if you earn over £30k, you could consider clearing the balance. Pic: Save The Student
Weighing up the interest
Let’s weigh up the interest rates and see if you could end up saving any money.
I checked our latest savings guide, and the best easy access accounts offer a rate of 4.85%.
I used the Bank of England’s calculator to have a look at how much interest you would earn in a year – it tells me that with 4.85% as a rate of return, you would earn just over £240 a year in “free money”. Over four years, you would earn just shy of £1,000.
I then used a couple of different student loan calculators to see what they said – I had to make a couple of assumptions about your salary (I put your salary at £32,000, though it varies, so I would recommend trying it yourself with your actual details).
One told me you would end up paying about £1,247 extra in interest by the time you paid off the loan (which it said would take seven years), while another told me it could be as little as £300 in interest.
I would try these for yourself and then weigh up the interest you would earn, versus the interest you will pay.
Other financial considerations
As well as assessing how likely you are to repay, you need to consider if wiping your Student Loan is a financial priority.
Tom says: “It is important to consider other factors, like what else your savings could be used for. Student Loans have no impact on your credit score and will eventually be wiped, so if you have other more expensive debts that need repaying, they should be your priority.
“Similarly, if you’re looking to buy a house or make another big purchase very soon, your savings could be better put towards that.”
This feature is not intended as financial advice – the aim is to give an overview of the things you should think about. Submit your dilemma or consumer dispute via:
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