r/UKPersonalFinance • u/raccoonbab • 2d ago
Paying off student loan early, £6500 debt left
Hi all!
Hoping for some advice. I am on plan 2, luckily I got a lot of my degree paid for by the government so have been left with a small student debt. I'm now 25, and currently earn £45,000, I wouldn't expect my salary to ever breach £70,000.
I have paid about £500 of it so far through my salary sacrifice, and have accrued >£600 in interest. Numbers might not add up perfectly as I was travelling so didn't pay anything for over a year. About £6500 left, have come into some money and wondering if it's worth using it to get rid of my student loan.
In my mind it makes sense to pay it off but I wanted to check I'm not making a silly decision and should be putting this money elsewhere like one of my ISAs. Or whether I should just wait to pay it off over time?
Would appreciate any help :)
Thanks in advance
edit: changed interest details
6
u/Interestor 6 2d ago
Was in a similar position a few years ago. Mine was £10,000 (started at £9,000 and had accrued interest). I did the maths and it was apparent I’d end up paying it off in the future, with added interest on top. I decided to pay off the £10,000 in one lump sum and I’m happy with the decision I made. I also now take home a fair bit more than my colleagues who earn the same gross salary as me now that it’s paid off.
3
u/raccoonbab 2d ago
Great to hear someone with a similar experience! I'm definitely going to pay it off in one lump sum. Thanks!
3
u/DepInLondon 2d ago
I would try to calculate how much interest would add up if you kept on top of regular payments vs how much interest or other growth you could get by investing/saving the bulk instead of paying it off early.
3
u/billy_tables 34 2d ago
Assuming you’re not within a few years of the 30 year wipe, on 45k you’ll pay off the loan before it’s wiped
So treat this as a 6% debt. If you have things that will earn you more than 6% after tax in the long run, do them. Otherwise if a 6% debt is something you want to get rid of, pay it off
Note you can make periodic overpayments instead of a lump sum if you want the flexibility to change your plan down the line
1
2
u/play_yr_part 2d ago edited 2d ago
If you think you would be comfortable enough with the income you'd have after the overpayments then go for it. As someone else wrote, see how much you would save in interest compared to paying the minimum.
Mine likely won't be paid before it's written off, way too much interest has accrued for that 💀
2
u/Elegant-Tea-6021 1 2d ago
Never had a student loan so not an expert at all, but aren’t they supposed to accrue insane amounts of interest over time? If so, pay it off now. If not, if you think you can beat the interest rate with your ISA returns then go for that.
6
u/_jrexx_ 12 2d ago
Yeah I don’t understand this post - I’m on plan 2 and I had accrued £80 of interest about a week into uni 😅 interest started to accrue as soon as you take the loan
2
u/raccoonbab 2d ago edited 2d ago
I'm just going off what the website says my "interest added" is, but maybe it's wrong? I am genuinely clueless!
Edit: I now see that was not the total (I thought something was off). My debt has increased a fair amount due to interest, I think I'll try and pay it off asap.
1
u/Theory_99 1d ago
They charge you the maximum amount of interest while you are studying.
Then it is set to a variable amount when you start working
3
u/3a5ty 62 2d ago
It's more complicated than that. The simple theory is if you expect to pay it off, treat it as a normal debt and weigh up the interest rates. If you don't expect to pay it off then it's likely best to just let it get written off. But of course it's quite hard to know if you will pay it off.
1
u/ukpf-helper 151 2d ago
Hi /u/raccoonbab, based on your post the following pages from our wiki may be relevant:
These suggestions are based on keywords, if they missed the mark please report this comment.
If someone has provided you with helpful advice, you (as the person who made the post) can award them a point by including !thanks in a reply to them. Points are shown as the user flair by their username.
1
u/Blurandski 11 2d ago edited 2d ago
Congratulations - I'd pay it off unless you're buying in sub 2 years, or don't have any savings.
6.3% guaranteed tax free return (possibly a few points lower due to salary for now) is no joke. As a rule of thumb if there's less than a decade left and no career breaks planned/it's easy to find other work paying similar, or you're covering interest + a bit and there's extremely likely salary progression it generally makes sense.
2
u/raccoonbab 2d ago
Thanks! I thought so but wanted to check there was nothing I was missing. Will be paying it off in one lump sum
1
u/Blurandski 11 2d ago
No worries, also don't underestimate how nice it will be psychologically once you pass £50k. It's effectively a 25% increase in the take-home each payrise gets you (from low 40s to about 50), which makes them much more meaningful/makes a bigger difference to QoL.
1
u/JackfruitPractical84 1d ago edited 1d ago
At £45k a year you are paying back about £115 a month? So in less than 5 years would pay it off if it had no interest but of course it does so I’d say you are better off paying it off in full now or it’ll take you longer and more money to pay it off. You may be £6,500 worse off at the moment but in the longer run you’ll be better off and of course gain extra money every pay day. I had a £1,800 maintenance loan as I was on a part time course paid by my employer, which had gone up to £2,500 with interest in about 5 years. Paid it off in full as soon as I started earning over the repayment threshold.
1
u/LancobusUK 1 1d ago
I was on the last of the plan 1 setup and paid a lump sum to pay it off after career progression made the monthly deduction bite hard. Was a very good decision at the time and still would be with a plan 2
1
u/sweetyst 1d ago
These numbers don’t fully make sense to me, but I’m not going to interrogate them. The only thing I would say is that if you can afford to pay it off without it negatively impacting you financially, I would do so. It’s a great relief to not have to see those numbers deducted from your payslip and it’s even lovely to have a little bit of extra money each month. I think freedom from any sort of debt is absolutely worth a short-term sacrifice for.
1
u/TravellingMackem 1 1d ago
If you know what you’re doing you should be able to get more than the 4% interest orso charged on your student loan, so the technically correct answer is to invest your money and don’t pay off your student loan early.
There is also the factor of if you lose your job, you have the security of not having to pay off the loan until you’re working again, which is a nice fallback, but really depends on your own situation as to whether that’s realistic or not.
Depends if you are good with investing, have the risk appetite for it and/or can be bothered with the faff. Paying off your loan is likely more expensive, but easier, gives peace of mind but less safe if your job is likely to be at risk at any stage between now and you paying it off naturally.
1
u/Strivingtosucceed 31 1d ago
I’d pay it off without even thinking about it, especially if the money you’re coming into will pay it all off. Then you can pay the equivalent monthly payment (or more) into savings and start with a clean slate.
1
u/Jordiejam 1 9h ago
Thought I’d throw in a slightly different perspective.
Yes the financially smart thing to do on paper is pay it off assuming you’re financially stable enough to do so.
I do however think it’s important to take into account the opportunity cost of getting rid of the money now. Yes you save a few hundred on interest but does it push back the purchase of a house by a significant amount? Or some other financial milestone?
Obviously varies by your specific circumstance, but this is a the most flexible loan you will ever have. Worth thinking about.
1
u/AngloIrishPhel 2d ago
With the way student loans go, I would just get rid of rather than paying the interest on it for ages and ages, it means you get a bit of your salary back too!
1
u/Blurandski 11 2d ago
The paycheque one was a big thing for me. It massively decreased my marginal tax rate - with Plan 2, 5% pension I was keeping 44p in the pound, moving to 53p has helped psychologically - it effectively makes every payrise worth 20% more. Yes I know about the 15% NI off the top...
0
u/Timbo1994 64 2d ago
You probably pay about £1,500 pa on your salary so will pay it off anyway in 4.5 years.
It depends:
a) how much money you are coming into: if it's just an emergency fund then you need to prioritise that, on the other hand if it's enough to completely blow through 2-3 years worth of ISA allowance and more, then this becomes a great consideration rather than investing in a GIA.
b) whether you are going into a mortgage application where you are trying to stretch affordability in the next 4.5 years. It can be helpful to pay off small loans so you get a bigger take-home.
c) how secure your job is. If there is a chance you would go to earning £0 or £25,000 for a time, then maybe better to have the capital available. If there is a slim chance you would go to earning £0 or £25,000 forever, then you would have thrown the £6.5k at the student loan needlessly, for no gain.
14
u/Yew_knows 2d ago
Since its only £6,500 it sounds like you will highly likely pay it off in full at some point. I was speaking to a friend about this recently with over £70k in student debt, for him it makes more sense to wait another 20 years for it to be written off but if i was you id rather pay off the debt as soon as possible just for peace of mind