Many graduates ask if they should pay off their student loan “debt” lest it affect future credit and mortgage applications. For me, it was the sharp drop in NS&I rates that prompted me to pay off my student loan in full a year earlier.
College seems to be a lifetime ago now – the best and some of the toughest times as I embark on a new chapter in my life, full of dreams and aspirations for adulthood.
After a fun gap year, I started college in 2004 and graduated in 2007. As I was eligible for the maximum maintenance loan payment (around £ 12,000 during the course), I ‘ve watched in horror my annual statements showing interest accruing on this amount each month and there was little I could do but ignore it for the time being.
In the “good times”, the interest rate reached 0% in 2009 in the aftermath of the financial crash. But I had also been billed up to 4.8% before the crisis.
In my last statement covering all debits and credits between September 2004 and February 2020, interest of £ 2,300 was applied and I only had around £ 2,300 to fully repay the student loan.
As I neared the end of my debt, I switched to direct debit payments rather than amounts withdrawn from PAYE. This is how graduates don’t end up paying too much for their loans.
Whereas before I made overpayments even when I was earning below the required threshold in order to pay off the loan faster, now I was thinking again about paying it off once and for all.
And for me, what motivated this decision were the sharp rate cuts from NS&I. I had savings in the Easy Access Income Bond product which was earning 1.16% AER. But in November, the rate was cut to just 0.01% AER.
Meanwhile, my student loan – just over £ 1,000 in January 2021 – was accumulating interest of 1.1%. It was a simple thought process, “Why should I pay this level of interest over the next year when the interest I’m earning on my savings is paltry?” “
With no other debts – aside from a mortgage we already overpay within the annual limit to avoid a penalty – and a range of short, medium and long term savings and investments, I thought that it was the right choice for me, taking into account my family’s financial situation.
And with another baby on the way and a remortgage due in 2021, it’s nice to know I won’t have to shell out three figures every month for this student hangover.
Now, this won’t be the right decision for everyone, so I suggest you read Martin Lewis’s excellent guide to student loan repayments – is it better to save or pay it off? before making a choice.
Paloma Kubiak is Associate Editor-in-Chief of YourMoney.com
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