Hi,
My daughter has just graduated university and has approx £45k of student loans. She is planning another year post-grad so can probably add another £10-15k to that.
We are wondering whether to cash in some investments and pay it off for her. The research I have done suggests not to, but I was brought up to pay off debt as early as possible and the interest rates that will be charged on it will be high.
I know there are a lot of variables in this, not least where she will work and what she will earn, but as a Law graduate even if she doesn't practice law I would hope she can make a decent living. She is likely to be paying this off, via tax, for 20-30 years.
Has anyone been through this and actually paid off the debt?
Advice would be appreciated.
Thanks. Mark
I haven't been in this position myself but my understanding from reading up on this a while ago was its best not to pay it off at this point.
She will slowly pay it off as a 'tax' on her income and if her circumstances change later and she doesn't earn as expected (due to job taken or starting a family) she wont pay it all back. I think id at least wait until she is finished and a couple of years into a job before making a decision when she/you have a better idea of earnings.
My son is in exactly the same position and it is not a good idea to pay it off.
Think of it as NOT a debt or loan, think of it as an extra tax on her future earnings.
It is likely that she will never pay off the loan and it then gets written off after 30 years (I think).
I really wouldn’t worry about it.
Daughters got a year left of her law degree and is in the same position. The interest in the loans isn’t as low as it was (and it starts the day take the loan out) - I’ve always been uncomfortable with debt, but it doesn’t make sense to pay it off. If you’ve got the money it would be better to use it for a deposit on a first home.
The one thing I would note is that the post grad loan is separate unless you do four year course initially that includes the masters. So you will have two loans of differing amounts and I think you are more likely to pay off the smaller post grad one. It is also a single set amount that has to pay for the course and any living costs unlike the degree course which is split and has the fees paid direct to the uni. You get the full money and have to pay the uni for the masters yourself.
I assume (but don't know) that as repayment is being taken as tax on earnings, it can be 'managed' by reducing taxable income through salary sacrifice into a pension scheme.
It might not be palatable, when starting out in life your salary can be low and expenses are high, but converting the loan into pension contributions would be a highly efficient way of saving. She's effectively choosing between paying it back to the government, or putting it into her pension.
Consult a financial advisor. There will be some sums to do.
It was something we thought about , perhaps not paying it off as much as making a loan since the rates are so high and the worry was they would rise higher , even at the now capped 7.3% that seems a lot of money to repay.
We were advised against it by our FA but part of me wishes I could get half of that 7.3% on my savings
I have had both undergraduate and postgraduate student debt.
Undergrad was approx 30k and postgrad almost £20k.
The undergrad part is inflation linked - so historically this was an incredibly cheap loan that would never be called in if you lost your job. I decided to just pay this as normal through PAYE, which I managed in about 8 years of work.
The postgrad debt ultimately needed to be paid first as it had a higher interest rate, so I made sure to pay it off using a mix of borrowed money from parents and overpayments in my first couple of years at work.
45k is probably better used as a deposit on a flat / house than to pay down student debt, as student loans don’t count against you when going for a mortgage
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Just to add that if she makes it as a corporate lawyer she will be paying that debt off very quickly, starting salaries at top firms are now over £120k a year plus bonuses.
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If you haven't already read the MSE on the subject, here's the page for loans taken out since 2012 https://www.moneysavingexpert.com/st...-student-loan/
Thanks for all the comments and advice.
It looks like the consensus is to accept the loan situation rather than pay off. As Martin Lewis says, it's a misnomer, it's a graduate tax.
If she earns enough she will have to pay the tax. ( Corporate Law at £120k+ looks unlikely at the stage !)
Spare funds/investments may be put to better use with the property ladder or supporting her net income.
Thanks again. I am reassured, if not entirely happy.
Mark
Smart money seems to be take the loans and think not why you owe. Think what you actually repay.
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It's never right to pay off student loans with cash. It's really a tax, not a loan. And pending the govt not taking the piss, it accrues so little interests there is no logical benefit of paying it off early.
P.s it also has zero impact on a credit rating as it is paid out of wages.
It is taken into account for a mortgage. The monthly payment is deducted as a commitment.Originally Posted by ozzyb123
I agree that’s it’s best used as a deposit for a flat.
My son has outstanding student loads and has only ever earned enough once, with overtime (he has a lower paid job that doesn't take him over the threshold that triggers this payment).
I'm sure I read somewhere that a high majority of these loads will never be paid off, so I certainly wouldn't be running to cash in investments to pay it off.
full disclosure…I’m an academic (did my clearing line stint today!) …but this is THE key con of fees. What I mean is it is more expensive for the taxpayer to have the current fee regime, because most loans are never paid. This has created a significant black hole in the national finances, it would have be less expensive (though in national economics ‘expense’ is too simplistic) for the tax payer to just keep funding HE from tax. You know the fee ‘book’ has partly been flogged off to investor firms?
The goal of fees was not to make uni affordable or fairer, it was to make it a market, (as in Australia) where students pick and choose based on metrics like the national student survey, and ‘poorer’ performing institutions would charge less. But unis we’re not daft, and when the govt said “you could charge less than the maximum” replied “hahahaha”.
Final thing, the Student Loans Company is a shocking organisation,
Anyhoo, to the OP. If there is any debt I’d help a graduate with it’s NOT fees, it’s any debt they took on from banks, like student overdrafts and credit cards. I’d get them cleared.
In a situation where the child is expected to be in the top 10-20% of earners, I'd think early repayment makes sense. Then, paying the ludicrous interest rates, compounding every year would be silly
In that situation I’m not sure how someone would notice they have fees to pay :)
Lol! You'd be surprised how quickly people's lifestyle expectations go up with earnings...
A graduate scheme with one of the major consulting or law firms, banks etc pays around £30k. If you do reasonably well in those jobs, in 10-12 years time, you are earning £100k - and ending up paying off the compound interest (3% + inflation) you have accumulated over all the previous 15 years!
Top 20% of earners is “only” above £45k pa so not sure early repayment makes sense at that level. Top 5% (£70k+) maybe.
Yep - I had dinner with David Willets who was honestly surprised that nobody was charging below the maximum. Nearly ten years since they fixed the fees - who could afford to?
Did they ever?
I found this informative.
https://www.moneysavingexpert.com/st...-student-loan/
Things have certainly changed since I was at uni; 2000 - 2004.
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