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I'm a current student at a university in the UK partway through my course. I've accumulated £21k of debt so far. The loan interest rate increases with inflation, and will be at over 6% next year (worse than any bank loan although I admit the repayment terms are more favourable).

I'm considering doing (some) early repayment during a year in industry next year. I've seen a lot of advice discouraging this, but my thoughts are:

  • The interest will likely to continue to increase with inflation. The total balance is increasing now whilst I'm studying, and since it's compound intereast it's better to pay now than later when I'm forced to.
  • Paying off the student loan is better than placing money in an ISA where the interest rate is, say 0.25%. By paying money off from the loan I'm 'saving' myself from being taxed on that amount at a rate of over 6%

I'm also considering foregoing taking the tuition fee and maintenance loans for the final year of the course which should further reduce the balance I have to pay off. Instead, I'd pay these up front.

It is likely I will pay off the entire loan balance (even paying the mandatory amount with no voluntary payments) once I graduate - so ignoring the loan doesn't seem like a good idea, even with the policies on automatic forgiveness after 30 years. It will just accumulate more interest which I will have to pay via taxes - money I could eventually put towards mortgage repayments.

I'm aware that this debt is not like credit card debt. It's not particularly nice psychologically to see the total balance though!

Are any of my conclusions incorrect - does this approach make sense?

  • I don't know too much about specific clauses in UK student loans, so I won't officially answer your question. But I can tell you that if the loan is accruing compounding interest now; then the sooner you pay it off the better. I'm not sure about the advice others have given "advice discouraging this". Unless perhaps the student loan is not yet charging you interest. Some in the states don't start until you graduate or 4 years has passed. If that was the case It would make more sense to save money that was earning interest now and pay later. – Keith Apr 23 '17 at 0:03
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    @Keith I think the reason it's discouraged is that it's not treated the same as a US student loan - it's a tax on your salary so it gets deducted via PAYE each month. If you were to get a degree and then not find a high-enough-paying job you wouldn't have to pay it back at all. – Adam Williams Apr 23 '17 at 7:11
  • @Keith - you are right in the sense that the highest interest loan should receive the most focus normally, but in this case the minimum repayment may not decrease the loan (it depends on income) and the loan doesn't​ have to be repaid. So I think to some extent this is a question of how well the OP can predict his future income and other money requirements. – nsandersen May 12 '17 at 8:41
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I think you're right that from a pure "expected future value" perspective, it makes sense to pay this loan off as quickly as possible (including not taking the next year's loan). The new student loans with the higher interest rates have changed the balance enough that it's no longer automatically better to keep it going as long as possible.

The crucial point in your case, which isn't true for many people, is that you will likely have to pay it off eventually anyway and so in terms of net costs over your lifetime you will do best by paying it off quickly.

A few points to set against that, that you might want to consider:

  • Not paying it off is a good hedge against your career not going as well as you expect, e.g. if the economy does badly, you have health problems, you take a career break for any reason. If that happens, you would end up not being forced to pay it off, so will end up gaining from not having done so voluntarily.

    The money you save in that case could be more valuable to you that the money you would lose if your career does go well.

  • Not paying it off will increase your net cash earlier in life when you are more likely to need it, e.g. for a house deposit. Having more free cash could increase your options, making it possible to buy a house earlier in life.

    Or it could mean you have a higher deposit when you do buy, reducing the interest rate on the entire mortgage balance. The savings from that could end up being more than the 6% interest on the loan even though when you look at the loan in isolation it seems like a very bad rate.

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    Some great points here that I didn't consider - especially an increased mortgage deposit leading to a better mortgage rate (and of course any such balance will dwarf the student loan balance). Definitely something I need to do some more research into – Adam Williams Apr 24 '17 at 9:51

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