Pay off student loan or invest?
Discussion
Okay, I know there's a ton of variables/considerations/attitudes in play here but I'm curious to know what PHers would do.
Son has £50k outstanding and is paying around £150 a month out of his wages. From what I can make out, the £150 seems to be £10 going towards the principal and £140 in interest. Seems mad to me but there you go.
He's in a reasonably secure job and is likely to be able to pay off the loan at some point in the future, in other words it's unlikely to be written off.
He could pay off a chunk of it or he could invest the money in an S&P 500 fund.
What would you do?
Son has £50k outstanding and is paying around £150 a month out of his wages. From what I can make out, the £150 seems to be £10 going towards the principal and £140 in interest. Seems mad to me but there you go.
He's in a reasonably secure job and is likely to be able to pay off the loan at some point in the future, in other words it's unlikely to be written off.
He could pay off a chunk of it or he could invest the money in an S&P 500 fund.
What would you do?
Edited by clive_candy on Sunday 16th August 18:39
Martin Lewis amongst others have done plenty on this, so worth googling their input.
From memory though, I think typically it's if a very high earner and you'll likely pay it all back before the cutoff date, overpay to avoid the interest.
Don't think it'll be cleared before the cutoff date and the debt dies, **** them.
From memory though, I think typically it's if a very high earner and you'll likely pay it all back before the cutoff date, overpay to avoid the interest.
Don't think it'll be cleared before the cutoff date and the debt dies, **** them.
maccboy said:
I would leave the student loan to run its course. If it's not paid off it'll be cancelled anyway. It really isn't his problem!!
I tend to agree with this. 40 years is a very long time. He may well end up paying it off in the end, but there is no such thing as a job for life anymore, and all kinds of other things could happen. Changing careers, spending extended periods out of work for whatever reason... clive_candy said:
NowWatchThisDrive said:
Eyeballing those numbers, I'm guessing he's on Plan 5 - is that correct?
It's Plan 2. _Rodders_ said:
From a purely financial POV I'd bet investing the money is the better bet.
But there's the psychological aspect of clearing the debt that shouldn't be underestimated.
It didn't make much financial sense to clear my mortgage and SL early but it felt damn good and I've got no regrets.
I cleared my SL for this reason...but...it was only at the point I had 8k left.But there's the psychological aspect of clearing the debt that shouldn't be underestimated.
It didn't make much financial sense to clear my mortgage and SL early but it felt damn good and I've got no regrets.
In this scenario I would just let it run its course and make sure the following is sorted
1. House deposit if not already
2. Any other high interest debt
3. Emergency/ rainy day fund
After that I'd just focus on investing in S&P/Global funds, regularly for 10, 20, 30 years
Can clear the debt in the future with investment gains if he so wishes
Also need to balance all of the above on enjoying life.
We could have paid off my daughters student loan, but as we'd want the money back eventually we would be converting a debt that might be written off to a debt that definitely needs paying off, and in maybe in 10 years!
Unless she works in London (which she doesn't want to do) she'll probably not earn enough to pay it off. Additionally being a woman, she might take maternity leave in future, which means paying off even less of the debt before it is cancelled.
I think she still has £15k of loan in her bank which she is using towards her first house.
Unless she works in London (which she doesn't want to do) she'll probably not earn enough to pay it off. Additionally being a woman, she might take maternity leave in future, which means paying off even less of the debt before it is cancelled.
I think she still has £15k of loan in her bank which she is using towards her first house.
NowWatchThisDrive said:
clive_candy said:
NowWatchThisDrive said:
Eyeballing those numbers, I'm guessing he's on Plan 5 - is that correct?
It's Plan 2. Looking at his most recent statement, he's making monthly payments of £124 against monthly interest charges of between £260 and £290.
So it's actually 'worse' than I thought, the payments he's making aren't even touching the sides.
You either back him to earn decent money and pay it all off before the interest has compounded too much, or you leave him with the debt which may or may not be written off after 30-40 years and put any other money to good use. The interest rates increase if you earn more and I think you generally need to be earning > £70k to actually be repaying any capital.
Psychologically it must be really difficult to see the repayments going out each month and know the debt is increasing. I can see it also disincentivising people to work harder as deductions will be so great.
Psychologically it must be really difficult to see the repayments going out each month and know the debt is increasing. I can see it also disincentivising people to work harder as deductions will be so great.
clive_candy said:
No, you're right.
Looking at his most recent statement, he's making monthly payments of £124 against monthly interest charges of between £260 and £290.
So it's actually 'worse' than I thought, the payments he's making aren't even touching the sides.
Fair enough. So current salary of ~£46k, and interest rate capped at 6% from September for the next year at least, but otherwise it's RPI (now 4.1%) + 3%.Looking at his most recent statement, he's making monthly payments of £124 against monthly interest charges of between £260 and £290.
So it's actually 'worse' than I thought, the payments he's making aren't even touching the sides.
How old is he?
A young chap at work told me about this website
https://studentloancalculator.uk/guides/pension-vs...
He basically follows their advice, aggressively salary sacrifice to his pension, the student loan payments minimum and the debt is growing but he mentioned that many does not care due to expiry conditions, so the attitude is F*** them indeed.
https://studentloancalculator.uk/guides/pension-vs...
He basically follows their advice, aggressively salary sacrifice to his pension, the student loan payments minimum and the debt is growing but he mentioned that many does not care due to expiry conditions, so the attitude is F*** them indeed.
If you assume a) current inflation persists and his salary rises with it, and b) the 6% rate cap persists (arguably optimistic), then essentially at 30 he needs to be earning £60k+ *in today's money* (or ~£73k nominal) and sustaining that thereafter in order to clear it naturally before the 30yr point. If that sounds unlikely and he's heading for write-off anyway then overpaying would be a pretty poor financial decision - basically buying nothing while giving up significant optionality - and the size of the "balance", however big/scary it gets, is meaningless really.
Is there not a legislation risk that loans get changed so they aren't written off?
The amount of interest they charge is unjust. Ideally it'd be interest free and never written off. At worst it should be no more than inflation. I was glad to clear mine and move on, but it was before the average amount borrowed got as big as it is now.
The amount of interest they charge is unjust. Ideally it'd be interest free and never written off. At worst it should be no more than inflation. I was glad to clear mine and move on, but it was before the average amount borrowed got as big as it is now.
Anyone starting since 2023 is on Plan 5, which is interest equal to RPI, vs RPI+3% for Plan 2. However the income thresholds before repayments start are substantially lower, and the term is 10yrs longer, so I think for most it'll end up being more expensive than Plan 2.
I think removing the write-off altogether would be a tough sell politically given the size of the Plan 2 cohort (most of which are expected to hit write-off) and the fact it'd fall hardest on the lowest earners. Given govt fondness for fiscal drag, keeping the thresholds (currently frozen til 2030) artificially low seems a good bet, and the 6% rate cap won't last forever.
I think removing the write-off altogether would be a tough sell politically given the size of the Plan 2 cohort (most of which are expected to hit write-off) and the fact it'd fall hardest on the lowest earners. Given govt fondness for fiscal drag, keeping the thresholds (currently frozen til 2030) artificially low seems a good bet, and the 6% rate cap won't last forever.
clive_candy said:
No, you're right.
Looking at his most recent statement, he's making monthly payments of £124 against monthly interest charges of between £260 and £290.
So it's actually 'worse' than I thought, the payments he's making aren't even touching the sides.
On a separate note, how is this actually legal!?! What a complete joke!Looking at his most recent statement, he's making monthly payments of £124 against monthly interest charges of between £260 and £290.
So it's actually 'worse' than I thought, the payments he's making aren't even touching the sides.
As people have said on other threads, it is simply a student tax at this point.
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