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A chance to start saving
By Martin Lewis
Don't pay off your student loan. Let me start my explanation why with a quick story. Recently I was interviewed by one of the major news bulletins about student debt and was asked how students can avoid it. My answer, "they can't and they shouldn't".
It was an ill-educated question - you can't solve the unsolvable. Students generally have no savings or income - the only funding available is loans - so they can't avoid it. What we need to start talking about is the right and wrong ways for them to borrow. Yet sadly we have become a nation educated into debt, but never about debt.
A serious impact
There is a fundamental misunderstanding about student loans in the UK. The impact of this stretches well beyond those studying for bachelor degrees today and affects millions of people in their thirties and beyond. The first student loans were introduced to students starting their studies in 1990 and graduating 13 years ago - and many still have them.
But even though it hits a huge chunk of the population, people still don't understand where student loans sit in the panoply of our finances. (I'm only talking about loans from the official Student Loan Company here and not any form of commercial debt lent to students.)
There have been two incarnations of the student loan and the deservedly poor reputation of the first type continues to resonate today, even though it's no longer offered. This acts as a disincentive, preventing students from embarking on their studies. With the original loan type, the amount you borrowed plus interest was divided into 60 monthly repayments. And provided you earn over a threshold, it must be repaid: this meant repayments could have a substantial hit on your finances.
A graduate tax
However, all students starting since 1998 have been offered new-style loans. You simply repay 9% each month of everything earned over £15,000. In effect, it's a limited graduate tax. You are simply paying more 'tax' until the debt is repaid - much less of a burden than the previous system and certainly nothing for students to worry about. The more you earn, the more you pay. If you never earn over £15,000, you never repay the debt.
It's also important to understand that student loan records are not passed to credit reference agencies, and so should not impact your ability to take on other forms of borrowing, such as a mortgage (unless it is assessed on 'affordability' criteria and it requests after-tax income).
Yet the most important point is that the interest rate on student loans is set at the rate of inflation - 2.4% for the current year - so there is no real interest to pay and you are not building up a compounding debt in real terms.
Quick repayment
This raises an important question: should you pay it off at a faster rate? Unlike with most types of debt, my answer to this is generally no.
If you have other borrowings, the chances are they are more expensive, so you should repay those first. Even if you have no other debts, but are likely to take on something like a new or bigger mortgage, that is always going to be more expensive than a student loan. So it is a better bet to build up your savings now so you will need a smaller mortgage, rather than use the cash to repay the student loan and then need to borrow it back on a mortgage at a more expensive rate.
Even if none of this applies, provided your savings are in a high-interest savings account, after tax you are still likely to earn more in interest than the loan costs you. However, if the 'debt-free' peace of mind is important to you, while the financially pure answer is don't repay, that's up to you.
Martin Lewis is the presenter of ITV1's Make Me Rich, author of the bestselling the Money Diet and the creator of the award-winning consumer revenge website MoneySavingExpert.com
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