Cheap food like 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. 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.
A quick look on a whole-of-market savings search engine reveals that Tesco offers the highest rate you can obtain on an instant access account at 3.6 per cent
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.
This only applies, however, if you have not used all of your ISA allowance this year. An ISA is a tax-free way of saving and NatWest is offering 3.25 per cent on its e-ISA. Hence both basic-rate and higher-rate taxpayers who took opted for this account would beat the interest on a student loan by 0.75 per cent.
There are of course other factors to consider because the student loan interest rate is calculated in a very complex way. Either it is the same as the Retail Price Index (RPI) rate was in March, or it is the top base rate of several major banks plus 1 per cent - whichever is the lowest.
At the moment, the RPI is only 0.9 per cent. If it stays below 2.5 per cent until March this year, there will be a reduction in September in the student loan rate. The new rate will then apply until September 2010. The same applies if there are more base rate cuts during the next six months, which are then mirrored in the base rates of the major banks.
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 15,000 pounds 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 cancelled. 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.
Article provided curtosey of Brokers Online Life Insurance |
