40

I just graduated university and started my first job. I have £50,000 in student loan debt at 6.1% interest.

My monthly payment on this debt is £10 (direct from my paycheck). I can afford to pay £200 a month, but should I?

I've heard that student loan debt is not considered a derogatory factor when being evaluated by a mortgage lender. Is that true?

What if any problems will I encounter by continuing with the current payment situation?

  • 24
    I am ignorant of student loans in the UK, but the monthly interest on this loan should be £254, so I can't see how paying £10 a paycheck (even weekly) is a good idea. Is the rest of the interest government subsidized? Do you even pay any principal with this plan? – D Stanley Oct 20 '17 at 14:24
  • 3
    @TTT £10 sounds about right - the payment amount is based on what you earn rather than the size of the principal. Look at some of the answers for details. – MD-Tech Oct 20 '17 at 15:53
  • 7
    @TTT It is not possible to make less than the minimum payment, rather the minimum payment is based on your earnings, not the size of the loan. – thelem Oct 20 '17 at 16:25
  • 9
    @corsiKa Unfortunately you cannot apply such a simple analysis to a student loan, because these loans are "forgiven" after a certain amount of time (e.g. 25 years for recently-issued loans in England & Wales). Some people may never expect to earn enough, or live in the UK long enough, to pay back anywhere near the total loan amount. In such cases, paying more than necessary is a mistake. – JBentley Oct 20 '17 at 23:08
  • 8
    If the comment starts "I am ignorant of student loans in the UK" then ignore it. They are so unique that any generic advice is simply wrong. – Mark Perryman Oct 23 '17 at 8:33
54

In the UK, supposing that this student debt is the government backed type debt and not private debt, then it will never be reported on your credit report and will not affect your chances of getting credit.

The student loan system in the UK is massively misunderstood by the general population and this lack of understanding is used for political aims by the media and political parties. Realistically the loans work like a graduate tax that stops when you have paid a certain amount. The interest rate is very low and capped by a function of the CPI measure of inflation and it is considered by credit analysts (I used to be one) as "good debt" meaning that it has at worst a positive effect on credit rating (it is actually normative in most cases). Paying it off early has some benefits in that it gives you more disposable income after paying off but this extra disposable income comes at a time when you have more disposable income anyway as you are earning more.

In terms of getting a mortgage the small monthly deduction from net income will have much less of an effect than your credit rating which, as mentioned above, this debt does not feature in.

Source: I'm in a similar position (just a few years older) and it doesn't show on any of my credit reports and never has.

  • 3
    @Grade'Eh'Bacon that £10 payment will count against the repayment schedule but by about £10 a month... – MD-Tech Oct 20 '17 at 14:21
  • 3
    @BenMiller if you never earn more than the minimum to start repaying you may never repay ANY of it! – MD-Tech Oct 20 '17 at 14:22
  • 2
    @CallumMaguire that depends quite a lot on your attitude to these payments. if you see them as a tax on education it probably isn't worth it, if you think that you are likely to pay the whole balance off then paying it earlier is better than later due to the interest. Check that you really won't pay it off by considering how much you expect to earn in 10-15 years time! – MD-Tech Oct 20 '17 at 14:27
  • 2
    @PeterGreen I am aware of this which is why it was just an example but my point is independent of the interest rate. If you pay nothing towards a loan (by earning too little) what difference is 1% interest vs 100% interest? – MD-Tech Oct 20 '17 at 15:09
  • 4
    @alephzero this is a contract so the government would have to retroactively change every contract which is difficult under UK law and would result in a lot of large court cases. Remember that the judiciary is both independent and many have or had student loans in their family. The biggest political risk currently is that the opposition get in and cancel all student debt. Ceteris paribus my answer stands – MD-Tech Oct 21 '17 at 6:43
48

For most people the answer is a strong No, you should not pay more than the minimum repayments.

UK student loans are a special type of debt with two big differences to a normal loan:

  • You are not required to make repayments while your earnings are low.
  • Many students will never repay their loan in full, instead the government will write off the remainder of their loans (typically 30 years after graduation).

Any overpayments you make will reduce your balance, but if the balance of the your loan is going to be written off anyway, then it doesn't matter to you what that balance is.

If you expect your career earnings to be high enough that you will repay the loan in full before it is written off then may be in your interest to make early repayments, but even then you will want to consider whether you have better uses for your money, e.g. paying off other debt or putting a deposit on a property.

Money Saving Expert has good resources for UK student loans: http://www.moneysavingexpert.com/students/student-loans-repay http://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes

  • 5
    +1 for making the very important point that many people will end up having a large proportion of their loan written off eventually. This is particularly relevant for people who don't expect to have very high salaries over the course of their working life, or who don't plan on remaining in the UK. Paying extra in those situations is just a waste of money. – JBentley Oct 20 '17 at 23:12
  • 1
    You are still required to pay it if you leave the UK, though it's harder for them to enforce. – Peter Green Oct 21 '17 at 12:27
  • 1
    @PeterGreen Do you have a source for that? The site I linked to on your answer says that the time period for having them written off commences when when you are first eligible to pay. For some older loans, they are written off when you are 65. I didn't notice anything about needing to be in the UK for the clock to run. – JBentley Oct 21 '17 at 19:26
  • 3
    @DavidLively I'd advise Norway. It's free there. – Tim Oct 21 '17 at 20:43
  • 1
    @JBentley slc.co.uk/students-and-customers/loan-repayment/… – Tim Oct 21 '17 at 20:45
9

The required payments depend on your income and if you manage to go a certain number of years (iirc it's about 30 though the exact rules keep changing) of making the required payments without paying the loan off then the loan will be forgiven. IIRC the loan will also be forgiven if you die.

As a result of this it is in general it is a bad idea to pay off UK student loans any faster than the government forces you to. If you end up unemployed or severely underemployed then you will only be required to make no or minimal payments on your student loan while a regular loan would be chasing you for payments.

A large deposit makes it easier to get a good mortgage deal. Furthermore the government has big incentive schemes for those saving up for their first mortgage deposit through the "help to buy ISA" or "lifetime ISA".

Overall I belive you will be far better served by saving up more money for the mortgage deposit than by paying off the student loan faster than required.

I would only consider paying off a UK student loan faster than required if all of the following are true.

  1. You have a stable long-term job or other stable long term source of income.
  2. You predict based on that job and it's expected career progression that you will be forced to actually pay off the loan before it is forgiven.
  3. You already have either bought a house or have saved up enough for a 25% deposit.
  • I've never heard of there ever being a 30-year write off period. When the loan is written off depends on a number of factors such as when you acquired the loan. See here. +1 for some very good points though. – JBentley Oct 20 '17 at 23:13
  • 5
    Seems it's 30 years for "plan 2" loans studentloanrepayment.co.uk/portal/… which is what I believe the OP has. – Peter Green Oct 21 '17 at 0:58
  • Ah, well spotted. It's weird that they've got that on a separate page. Just a further note, this would apply only to loans taken after 1 September 2012 in England & Wales. If the OP's loan was in Scotland or Northern Ireland then the first table would apply. – JBentley Oct 21 '17 at 4:04
  • I'd personally add (4) - You can easily afford to pay more towards the loan, or already have enough savings to comfortably pay it off and still have some left 'for a rainy day'. Mentally, I prefer to have no debt. However, rich people know that having debt you can comfortably pay off is actually helping you because it frees your money to do something more profitable. In the asker's case, things "more profitable" than giving the government their money back might be "buy a massive TV or add an extension to my new house", or "buy a car so I can drive to see my S.O." or some such. – Ralph Bolton Oct 23 '17 at 13:13
4

I heard this debt doesn't count towards a mortgage.

Maybe or maybe not, but it sure does count towards towards your bank account, and your bank account is where your mortgage payment comes from...

EDIT: what I mean is that you need to consider it when determining how much that you can afford.

4

I've heard that student loan debt is not considered a derogatory factor when being evaluated by a mortgage lender. Is that true?

I'll focus on this part of the question since there are plenty of answers for the rest. I'm going to assume that by "student loan" you mean the official government-sanctioned one administered by The Student Loan Company and not just a personal loan from a bank aimed at students.

Student loans do not appear on your credit history. There are numerous sources claiming this, but I can also confirm it personally as I have a student loan and am in the habit of obtaining my credit report from all three main agencies (Equifax, Experian, Callcredit) on a regular basis: both the statutory reports and the online ones. In 16 years it's never appeared on any report.

However, that doesn't necessarily mean that it is irrelevant for a mortgage application. The majority of applications will ask you to provide a list of your assets/liabilities and your income/outgoings. If you fail to mention your student loan then it is entirely possible your lender will never find out, but it could be considered fraudulent (which if discovered, will negatively impact your application as well as future applications, as lenders also report to fraud agencies as well as credit agencies). One possible route to discovery would be if the lender asks to see your tax returns (not uncommon these days).

Primarily this information will be used to determine affordability. Not all lenders treat all outgoings the same, and the regulations are constantly changing. So it's best to discuss this with an experienced mortgage broker. From what I've read, affordability is the only issue and lenders won't consider it a "black mark" that you have a student loan. Note that at £10 per month, this is so small that you might as well consider it irrelevant from an affordability perspective.

  • It is also worth noting that the impact of £10 per month outgoing is much smaller than the benefit of having more savings by keeping the £190. (Ergo this is not a reason to overpay the loan.) – Mark Perryman Oct 23 '17 at 8:27
  • 1
    On the other hand size of deposit will affect mortgage affordability and price. Paying off £5000 of your loan will make no difference to repayments for many years. The same amount would make a huge difference to the deposit on a flat. – thelem Oct 23 '17 at 8:40
2

In my own highly specific situation (UK, graduated in 2009) it made sense to repay early. I had saved up a large deposit towards buying a house, and built up an excellent credit score, but I still had about 1-2 years worth of repayments due at the point when I wanted to get a mortgage, and from speaking to various lenders and brokers it was clear that despite its relatively small size, this outstanding debt was deterring some of them from offering a particularly low interest rate. In this context, it made sense to sacrifice a small portion of my deposit.

  • 2
    If you are in the UK then either you were a student a long time ago and/or you have an exceptionally high paying job. Interesting, but exceptional and not relevant to the questioner. – Mark Perryman Oct 23 '17 at 8:30
  • "And then, when I sold my second quant startup, I did decide to pay it off ..." :) – Fattie Oct 23 '17 at 21:39

Not the answer you're looking for? Browse other questions tagged or ask your own question.