Should You Pay Off A Student Loan

Education is something that not everybody has. So you should value your education. There's something that I've been trying to figure out recently. Just how much value should we place on an education? What I'm trying to illustrate is that this is the great power of education. The power to lift people out of poverty. There was a time in this country when a higher education was free. But those days are long gone. In 1990, when the Student Loan Company was founded, the average loan was £390 a year. It was to help with living costs. Today, the average loan amount at graduation is £45,000. There is someone in the UK alive today who owes the Student Loan Company £200,000, you know, living costs. By 2040, our government thinks that in order to access the value of an education, the people of the UK will owe £460 billion. How will we ever pay that off? Should you even try to pay that off? What's the criteria for a successful university course? It was 1997 when Sir John Dearing released this report into the future of higher education in the UK. The so-called Dearing report was more of a dear John to the education system of old, breaking the hearts of students who would now need to pay towards their education. We see a need for those who benefit from education and training after the age of 18 to bear a greater share of the costs. A cost that they consider affordable and justified by the probable return of their investment of time and money. I wonder if John ever thought when he made that suggestion we would get to a place where a surf science degree from Cornwall University would swell to the price of £9,250 a year. You just get spit right out of them. I question if students would consider 10k a year in tuition fees, not to mention the living costs themselves, affordable and justified if they had to pay it all up front. How many students really consider the probable return of a university education when the student loan system allows them to kick the can down a very long road? Don't let money get in the way of university. How long it takes you to pay back that loan all depends on which student loan plan you fit into. There are five in total. Plan four is for Scotland and three applies to postgraduates. The other plans really are about when you studied and when you start paying back the loan depends on how much you earn. This differs from plan to plan and so does crucially when the debt is wiped off, which varies a lot from the age of 65 to 25 years after you finish to 40 years after you finish on the newest plan. Instead of going through this line by line, below I've linked this table if you want to access it. Just click the link and I'll email it to you. But can we just take a moment to acknowledge the interest rate on these loans? 7.8% at the top end. Now that rate's not static, it's not a fixed percentage. If we look at this rates table we can see how they've changed in recent years. We can just see that the rates really have cranked up recently. The reason for two columns is because most loans the rate you pay is either RPI, the Retail Price Index, a measure of inflation. And if you earn above a certain threshold, this increases to as much as RPI plus 3% which is this measure here. When I was at uni the common wisdom that was thrown around was always student loans are the cheapest loans that you'll ever get. The interest rate is so low just forget about it. Martin Lewis comments on this actually even today around how he thinks people view this interest rate incorrectly. Everything's gone up in line. The fact that the number's gone up doesn't matter because your wages have gone up, costs have gone up, everything's gone up in proportion to each other. Do you understand that concept? I think we understand and he is correct in what he's saying. The only criticism I have though is that wages have not always matched the rate of inflation over the last decade or so. It's not this perfect relationship where you know they all go up at the same time. But if we apply Martin's logic to the peak of the problem recently. The problem is you don't get much for a pound these days. Headline inflation was quoted at 11%. At the same time wages had grown by about 6% and the interest rate being applied to student debts was around 7%. So in real terms the loan value had actually fallen versus inflation but risen slightly above wages as the purchasing power of workers in this example was significantly below the rate of inflation and just below the interest on the loan. Wages did then continue to rise above inflation post this but this is not a perfect example again. It's not like as Martin describes it's not that they all lift up at exactly the same time. It's more an on average over a long period of time we hope it all comes out in the wash kind of thing. But Martin is correct that 7% being slapped onto your debt is not a real 7% rise. It's more just trying to keep up with inflation. And as inflation falls so too will the annual rate of interest being added to the loan which is set each September. But I imagine you know sitting there at home getting your statement through the post and seeing 7% interest added on feels crap. I think it's seeing all this interest added onto the loan that's prompted people to think I need to do something here. The loan is going up by more than the payments I make. I mean you could get a bank loan for cheaper than that but with a bank loan you repay every penny. I've paused to let you answer but I hope you appreciate that I can't actually hear what you're saying so I'm just going to tell you anyway. That's the figure that the IFS come up with as to how many people won't repay back their full student debt. They will essentially hit the limit at which point the debt is wiped. So this is the point that's key to the discussion today on if you should overpay or focus on clearing the debt sooner. If I asked you what is the cost of university you might sensibly say well it's tuition fees plus another bit for maintenance loans and then interest over the period. You would be right that say 50k in interest is the price tag but that isn't the cost that's the price on paper. The cost to an individual is typically somewhere between zero and around 150,000 pounds and the determining factor on how much it costs you is not what course you did. It's not even the interest that's added to the debt over the lifetime of you paying it. It's how much you earn. The factors that really influence the cost to you then for this reason are the threshold at which you start paying back the loan, this number and if that rises with inflation. It didn't recently which means in real term student loans are costing people more but the amount that you earn above this number in the context of this percentage is the monthly cost and this is how much you're really going to pay. And then also another key consideration is when the debt is wiped. If you're on Plan 2 and once you leave university you get a job on £28,295 a year and then you never get a pay rise you'll be paying £90 a year to your loan that's 9% of the 1k above the threshold. Over 30 years you would have paid a total of £2,700 to your education costs. Any overpayment that you make during that period would not reduce your monthly payment and would only likely serve to increase the total cost of your university education. Let's say you go I'm going to whack in an extra 2k. You're still going to be paying the £90 a year you've just moved the cost of university from £2,700 to £4,700 and the student loan company will happily take that money off you. They even say that if you make an overpayment yourself and then you decide that you want the money back they won't give it to you. There are some really good student loan calculators online that can try and help you make this decision in your own personal circumstances and I've linked them below for you. But I think it helps to visualise it like this. If this is 100% of the people who take a student loan based on plan 2 rules at this end we have anyone who earns less than £27,295 and at this end we have high earners. Let's say a high earner in this example is anything above 80k a year in income which puts you in the top 5% of earners in the UK. How much you pay back works a bit like this. Below this line income wise people pay nothing. They never crossed the threshold. Their education for this reason was essentially free. This end is the 13% who pay back everything including all interest added onto the loan and then there's this big range in the middle here which goes from this end who probably don't even pay back what they borrowed let alone the interest before it's wiped and then a range who will pay back what they borrow plus some interest but not the full balance before the loan is wiped. It's this range of options that makes this question complicated to answer and the fact that a student loan shares characteristics of both a tax and a loan at the same time we might want to overpay loans. We definitely don't want to overpay tax. For low earners they should not overpay but this range in the middle is pretty unclear made even worse by the introduction of a 40-year payment on plan 5 and the freezing of the bands which means that most people now pay more than they would have. So my opinion on this for what it's worth please understand it's not financial advice. What applies to someone on plan 1 won't apply on plan 2 or 5 and I don't know where you fall on the income distribution either but if I was in the middle earning range where it's unclear which option to take I would probably only overpay my student loan if I was sure that I was going to clear the debt in full maybe I'm on plan 1 or I've nearly paid it all off or I know I'll be a high earner and I've already maximized other financial opportunities and milestones in my life. The kind of money we're talking about here I would say putting down a deposit on a house is a better use of that amount of cash or even throwing money into a tax-efficient vehicle like a pension that'll give you significant tax incentives for doing so. You could even if you wanted to invest the money in say a stocks and shares ISA I'll list the ones below that I use in the description but then you have the flexibility of if you ever find yourself in a position in the future where you're like oh crap I'm earning a lot now I am going to clear this at least you can access the cash you could also put it in a cash ISA if you want if you're a bit more cautious. The thing about this question is you won't actually know if you made the right decision until past the event but again use the calculators that I've provided below to inform that decision a bit more. I think we've all realised now that for most people watching this that don't get family support paying for a university education you're not taking out a loan you're signing up to a graduate tax. The Deering report laid out that it wanted to make sure students saw the cost of university as affordable and justified. You could argue in a way that the loan system ensures there are no barriers to getting that education but I'm sure many of us are going to sit here going is it really worth it? A 30 or 40 year commitment which is essentially a 9% graduate tax for a three-year education is that worth it? I just want to quote the IFS here going to university is a very good investment for most students over their working lives men will be about £130,000 better off on average by going to university after taxes student loan repayments and foregone earnings are taken into account for women this figure is £100,000. So while it's not great that that figure isn't the same for men and women the IFS is saying here that they think a university education leads to higher lifetime earnings so I hope that makes anyone feel better that currently has a loan. If you're sat there thinking should I? shouldn't I go? Well just understand that the cost of university is very real and there are calls constantly from universities to make the ticket price for tuition fees even higher. Don't just do it because you think you should or you're unsure what to do with your life you'll end up doing a three-year course in surf studies only to wind up in a call centre in landlocked cotton in the elms and not a scrap of coastline for 100 miles in every direction. This is a big commitment you will live with this commitment for most of your working life and let's face it there are other options you could go travelling you could do an apprenticeship you could get a trade or here's a suggestion