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Associate Article

Is it time to pay off my student loan?

Whether you get a 1ST, 2:2, or a mere pass, there’s one thing that you’ll have in common with most other graduates – debt. Research from Natwest shows that graduates leaving University in 2007 left with £12,363 worth of debt, and this figure is set to rise due to the University top up fees that arrived for 2006/2007. Most of the graduates in England and Wales until 2009 will have close to £9,000 worth of student loan debt if they got they average amount available. If they get a job that pays a yearly salary of over £15,000, they will pay 9 per cent of their earnings towards the loan, as a kind of graduate income tax. Student loans also accrue interest, which is at 4.5 per cent this year, so as well as having to pay the initial £9,000 off over however long a period, you will also have to pay the interest.

Clearly debt has become a big worry for graduates. On the social network of all things student – Facebook - one person set up a group entitled, ‘GRANTS to reimburse students / graduates who began uni between ’98 and ‘06’ which was initially aggrieved about not receiving grants as many people now do. However, it’s subsequently changed to a ‘scrap all student debts’ message and has ballooned in size to some 69,331 members (13/12/2007). Meanwhile a group called ‘The Student Loans Rip Off’ expresses grave concern about the doubling of the interest rate on student loans this year. This has 25,717 members.

While these groups are clearly concerned about student debt and create quite a lot of worry, they fail to mention that student debt is incredibly cheap. Even at the current rate of 4.5 per cent, which is unusually high because of inflation, student debts are cheaper than all forms of credit offered by high street banks, and they will almost certainly remain so. With that in mind then, if you have spare cash, paying off student debts straight away is highly unadvisable.

Most people will need credit at some stage of their life, such as on credit cards, or paying for a mortgage. Both of these options are much more expensive than student loan debt. Currently, the average cost of mortgages on the Motley Fool website is around 5.5 per cent initial rate, and 6.5 per cent thereafter. Credit cards from Natwest, meanwhile, come with a rate of 13.9 per cent, and this is at the better end of the market. Student debt, therefore, wins hands down.

If you owe student debt but have, for example, £3,000 in cash in your current account, then it’s possible to make a profit from interest rates. Alliance and Leicester’s top savings accounts offer an interest rate of 12 per cent when it’s combined with your current account – that’s a whole 6.5 per cent in interest over your student loan, so it’s making you a profit!

So, in a nutshell, don’t pay off your student debt unless you never intend to take out credit again. The cheap interest will almost certainly save or even make you money in the long term – it’s the cheapest loan you’ll ever have!





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