If I could pay off my student loan in full, should I?
15 March 2021
Question by Tom
I am 25 years old and just starting to manage my money like an adult! I currently earn c.£45k per annum before bonus, and I am on a reasonably high earnings trajectory likely to be earning c.£100k inclusive after 6/7 years of work. I attended university from 2012-2015, and as such I have a full student loan on repayment plan 2. I am relatively well read up on student loans, and do understand it serves more as a tax on higher education as opposed to a traditional loan. The value of my loan at present is £43k, and at the current rates of interest, I pay back less than the interest each month. Having undertaken some cash flow analysis, I know I will be one who repays their loan in full and estimate it will take 15-18 years to fully pay back. Over this period I am likely to incur over £30k of interest... my question is: A) if I had access to £43k today (borrowed/begged from family) to pay the loan off in full, is that worth doing? Or B) is that £43k better put to work elsewhere in investments? I live in London and currently rent - I also have aspirations to build up a buy to let portfolio in the regions, and therefore this hypothetical £43k could be put to use here. I am interested to hear what you would regard as the most efficient use of my money. Many thanks, Tom
Answered by Pete Matthew
With your earnings where they are, you're paying the top rate of interest on the loan which means, as you say, you're paying off less than the interest payment at the moment.
For lower earners, it's rarely worth paying off the loan in full as you could likely put the money to better use, but you're going to be paying the price for your higher earnings potential.
Assuming you can get hold of £43,000 to pay off the loan... Would that itself be borrowed?
If so, can I presume that the interest payable to (say) your family would be less than the student loan interest rate?
I imagine so, but borrowing from family is fraught with issues. What if you decide to take a holiday - would your family benefactor be looking askance at you, wondering why you were taking a holiday while you still owed them money?
Be careful not to destroy your relationships over money.
But your question is more about how to deploy the money - should you pay off the loan or invest it to grow instead?
If you invest it, you are in a sense borrowing to invest, which is rarely a smart move, particularly for a novice.
If you lose on your investments, you no longer have the opportunity to pay off the loan with the capital. Plus, given the meaty rate of interest you're paying (RPI plus 3%) you'll have to invest pretty aggressively to beat that at current rates.
I'd remind to you that decisions like this don't have to be binary - it isn't the case that you EITHER pay off the loan OR invest - you could do a bit of both.
You could receive (say) £20k from family and pay off a chunk of the loan, potentially start to overpay and reduce it down much more quickly, saving interest in the meantime.
If you got more from family, you could do this AND invest a portion. I would re-run your numbers based on a hybrid scenario and see what the impact on payment term and interest payable might be.
Remember that there is no 'right' approach here, only many possible options. Find one which works for you, which balances the psychological benefit of paying off the debt, with the mathematical balance of investing versus debt reduction, and make a judgement.
Hope that helps.
Chartered Financial Planner
Pete is a Chartered and Certified Financial Planner and serves as Managing Director of Jacksons Wealth Management in Cornwall. He is also a prolific financial blogger and podcaster at MeaningfulMoney.tv with a desire to get decent financial information out to everyone who needs it.