Should you pay off your student loan?


I have been reading a very interesting article on regarding student loans and the rise in interest rates. It asks the question, should you pay off your student loan?

People that took their student loan out between 1990 and 1997 have been enjoying a negative interest rate for the last year. This meant that their loan actually decreased over the year! This has now all changed and, if you took your loan out during this time, you are now staring down the barrel of a rate of 4.4% wtf!

For those of us that took out our loans after 1998 then the rate is much better for this year at 1.5% (still up from 0%!). However, this rate tracks the Bank of England base rate, which means if that rises, so does our rate. This can rise to a maximum of 4.4% as well!

Whilst us post-1998ers are not as screwed as the pre-1998ers with their 4.4%, 1.5% is hardly the very low rate I remember being sold on when we all took out our loans. The loans are still rising year on year!

The guide also explains how the loans have no real cost as the interest we pay is linked to inflation, basically the cost of everything rises. Here is their example:

Why Irma Scholar pays no real interest…

New student Irma Scholar needs a £1,000 student loan, enough to buy her twenty trips to the supermarket. The loan interest rate is set at the rate of inflation, which over the next ten years averages 4%. To help keep this example simple, Irma decides to repay it all at once in ten years time, having never repaid a penny before.

The 4% annual increases mean she must pay back £1,480; this sounds like it’s expensive, yet everything else has gone up by the same proportion too; wages and the price of goods. So in ten years time £1,480 still buys Irma roughly the same twenty supermarket trips worth of goods.

In other words the borrowing hasn’t diminished her spending power at all, she borrowed twenty shopping baskets’ worth and repaid twenty shopping baskets’ worth.

Exsqueeze me? Her annual 4% wage rise? Get real! Most of the people I know that are in the work place are either getting no pay rises or are on indefinite pay freezes! I think this “no real cost” is bullsxxt.

The article goes on to argue that you shouldn’t repay your loan as the rate of interest is so low, which I guess it is compared to high street borrowing. This argument only really seems to work if you buy into the “no real cost” thing and you are going to get an annual 4% pay rise, which kids, in the current climate you are not, sorry!

Anyway, read the guide as it is very easy to follow and outlines the whole thing very clearly. I don’t really agree with their conclusions, but that is from the situation I and the people I know are in, you should obviously base any decision you make based on your own situation! Their argument for saving the money for something else is a fair point, so make your own mind up!

Leave a Reply

Your email address will not be published. Required fields are marked *