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I was under the impression that UK student loans were really cheap credit, and were incredibly low interest rates. After hearing some radio shows on student finance their advice was to always pay the minumum as its the cheapest debt you'll ever have

I'm not sure this is the case.

In my final year of uni I took out a £3000 loan, thats all I borrowed.

After about a year of working I started to get deducted student loan payments from my wages, it varied month to month but ranged between £35 and £75, so lets take an average of £50

I've actively been paying now for at least 24 months, so that would be 24 x £50, so that would be about £1200 paid off so far.

I recently got a statement saying my current student loan balance is £2400, either there had been an admin error on their side, or there is some poor interest rates on this

Can anyone advise?

  • What is the question exactly? – JohnFx Sep 20 '10 at 20:13
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From the description, you have a post-1998 income contingent loan. The interest rate on those is currently 1.5% but it has varied quite a bit in the last few years due to the formula used to calculate it, which is either the inflation rate (RPI), or 1% + the highest base rate across a group of banks - whichever is smaller. This is indeed really cheap credit compared to any commercial loan you could get, though whether you should indeed just repay the minimum depends on making a proper comparison with the return on any spare money you could get after tax elsewhere.

There is a table of previous interest rates. From your description I think you've had the loan for about 4 years - your final year of uni, one year of working without repayments and then two years of repayments. A very rough estimate is that you would have been charged about £300 of interest over that period.

So there's still an apparent mismatch, though since both you and I made rough calculations it may be that a more precise check resolves it. But the other thing is that you should check what the date on the statement is. Once you start repaying, statements are sent for a period ending 5th April of each year. So you may well not be seeing the effect of several months of repayments since April on the statement.

Finally, there's apparently an online facility you can use to get an up to date balance, though the administration of the loans repaid via PAYE is notoriously inefficient so there may well be a significant lag between a payment being made and it being reflected in your balance, though the effect should still be backdated to when you actually made it.

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  1. Call and ask for another copy of the terms of your loan in writing.
  2. Make sure you fully understand the true real cost of variable rate, compound interest. It is much worse than you would guess.
  3. Let this be the last time you get into this situation.
  • Just to clarify, "get into this situation" means borrowing without understanding the mechanism behind your balance and its worst case scenarios. – James Roth Sep 20 '10 at 23:31
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    -1: I don't think this answer really addresses the specific question. In fact compound interest in this scenario would have a pretty small impact. – Ganesh Sittampalam Sep 21 '10 at 20:25
  • There is no "specific question." The answer and the impact of compounding depend on the rate and duration of the loan, neither of which are given. Providing the process for finding the answer is more valuable than spoon feeding it. – James Roth Sep 22 '10 at 1:59
  • The question does give enough information for the details to be found, even if the questioner didn't provide them himself. I think the purpose of this site is to provide useful answers, not to patronise people, though there is a balance to be struck especially when they have obviously done no investigation or research at all. I don't think that's the case here. – Ganesh Sittampalam Sep 22 '10 at 7:29
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    Your attitude towards me, a commenter with a different opinion and communication style, is quite patronizing. I don't agree with you or your condescending, disapproving nanny attitude. Like many young people, this person needs to be made aware of the dangers of borrowing. He was very lucky to have had access to a non-predatory lender, but that won't always be the case. – James Roth Sep 22 '10 at 14:37
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If I recall correctly, the pay schedule is such that you initially pay mostly interest. As James Roth suggests, look at the terms of the loan, specifically the payment schedule. It should detail how much is being applied to interest and how much to the actual balance.

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    It's a feature of any amortizing loan with fixed payments that the initial payments go more towards interest than principal, simply because there's more interest to pay when the principal is higher. – Ganesh Sittampalam Sep 21 '10 at 20:09

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