Every Monday, on our Money blog, we welcome an expert to answer your money problems. Today’s question is from Ellie, who asks…
“My outstanding student loan balance is around £5,000 and I’m paying it off with an interest rate of 4.3%. I can’t decide whether it would be better to pay it all off at once or leave the money in a savings account. Can you help? I also overpaid, so I’m technically owed a £300 refund – but should I take that money out? »
I first established with you that paying off your student loan balance would not wipe out your savings, because having an emergency fund is very important no matter what stage you are in . It is recommended to be able to count on the equivalent of three months of essential expenses.
I then looked at Save The Student (STS) to see if we could figure out what your options are.
They needed a few more details and we figured out that because you are on Plan 1 and you graduated in 2013 (and therefore started repaying your loan in April 2014), your loan would be forgiven after 25 years , in 2039.
If you are ever unsure of your repayment terms, you can find them here…
Tom Allingham, student money expert at STS, says: “It’s an age-old question, and there’s no single answer that applies to everyone. But for me, the most important thing to consider is the likelihood that you will repay your loan in full before it is forgiven.
“As a Plan 1 student loan holder, you are already more likely to clear your balance than others, because the repayment threshold has always been the lowest and the debt will not have generated as much interest than on other levels.”
He pointed out that you are left with a relatively small amount of debt and have more than half of your repayment term left to go. Without knowing your salary, it can’t say for sure whether you’ll repay your debt in full, but the general consensus is that if you earn around £20,000, you’ll pay off your loan before 2039. That means paying it off sooner. could end up saving you interest that you would otherwise pay.
But if you earn less than £30,000, it might be worth reconsidering your decision – and even claiming the refund you’re owed.
Tom from Save The Student says if you earn more than £30,000 you might consider paying off the balance. Photo: Save the student
Weigh the interests
Let’s evaluate interest rates and see if you could save money.
I checked our latest savings guideand the best easy access accounts offer a rate of 4.85%.
I used the Bank of England calculator to work out how much interest you would earn in a year. She tells me that with a 4.85% rate of return you would earn just over £240 a year in ‘free money’. Over four years you would earn just under £1,000.
I then used different student loan calculators to see what they said: I had to make some assumptions about your salary (I set your salary at £32,000, although it varies, so I recommend you ‘try it yourself with your real salary). details).
One told me you’d end up paying around £1,247 in extra interest by the time you repaid the loan (which he said would take seven years), while another told me it could be as little as £300 interest.
I would try them for yourself and then weigh the interest you would earn versus the interest you will pay.
Other financial considerations
In addition to assessing your likelihood of repayment, you should consider whether forgiving your student loan is a financial priority.
Tom says: “It’s important to consider other factors, such as what your savings could be used for. Student loans have no impact on your credit score and will eventually be wiped out. Therefore, if you have other, more expensive debts to repay, they should be your priority.
“Similarly, if you are planning to buy a house or make another large purchase very soon, your savings could be better used for this purpose.”
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