Many graduates that have outstanding student loans may wonder whether they should repay the loan early. They may get their yearly statement and see how much they owe and wonder if they should be paying back extra so that they can clear the debt more quickly and not accumulate so much interest on the loan. However, it is really important to make sure you have a good understanding of how the loan works before you decide whether to repay it or not.
When is the Loan Written Off?
Student debt tends to be for a specific period if time. This does depend on the type of student loan that you have. They have changed over the years and postgraduate and graduate loans are very different, but the most common ones will have the debt written off after thirty years. This means that if the graduate has not been able to repay the debt in the thirty years, then the government will stop taking from them and absorb the cost. This means that many graduates will never repay the full amount of their loan and therefore paying some or all off early, means that they will be repaying more than is required. Therefore, in many cases it is better to not repay the loan early, if the student does not want to repay the full amount that they borrowed. However, this could change, it has already changed for new students and the government does tend to change the way the loans work from time to time even for existing borrowers, so it is really important to make sure that you stay aware of this as it could have a significant impact on whether it is better for you to repay or not.
What is the Repayment Threshold?
The repayments are means tested. This means that only when a graduate is earning over a certain amount of money will they need to start repaying some of the loan. This amount will increase as salaries increase and so high earners will repay large amounts and low earners will repay nothing. It is expected that a salary will increase over time and so repayments will probably increase over time. The government also is likely to change the earnings threshold when repayments have to start. They have already done this a few times and this is going to increase the repayment amounts that are made. It is unpredictable as to what impact this might have on the chances of you repaying the loan in full because we cannot tell what the government might do in the future and whether this might change again if another party is elected. However, if you are in a career where salaries are low, then there is still a chance that you will not repay all of the loan. However, if you are in a well-paid job then the chances are you will repay in full.
When to Repay Early?
Therefore, if you think that you will have to repay the loan in full, then there could be an advantage in paying extra from the loan. This is because interest is charged on what you owe and the less you owe, the less interest is charged. Therefore repaying it early will mean that the loan is cheaper. You will also be out of debt sooner which will be a nice feeling. You may also feel that you want to repay all of the loan, regardless of whether you are obliged to. You may like to give back and repay because you have benefitted form the course and enjoyed it. This isn’t something that you have to do but it might be something that you morally want to do.
If you would rather repay the minimum and you are not sure whether you will be working at the high salary level for the whole time you are repaying, then you may not repay it all. For example, if you work part-time to look after a family or decide to have a bit of time off work to travel, then you could find that you will miss some repayments and this will influence whether you can pay the loan back in full. Therefore, it is worth thinking hard about whether you really will be able to repay the loan or not.
It is often not a gamble, as 75% of graduates do not repay their loan in full and so it is very likely that this will apply to you. However, new students may find that this is not the case. The government are in the process of changing the rules so that graduates have to repay over 40 years and not 30 and this could mean that many more will repay their loans and will therefore benefit from repaying early. The threshold when graduates have to start repaying has also been lowered so repayments will start earlier and rise sooner, which again will increase the chances that you will repay your loan in full. It is good to make sure that you do some calculations and think about what might happen in the future. Think about what your salary might be, whether you will be likely to have any gaps in your career, whether you will benefit more from putting money aside (perhaps towards a house deposit) rather than paying off extra money from the loan. It can be a difficult decision but discussing with others, perhaps even a financial advisor should help you to feel confident that you are doing the right thing.