Should You Pay Your Student Loan Back Early?
A student loan is something that is commonly taken out to cover the costs of a university degree. With grants no longer available for many students and much lower in value, most students will need to borrow money to pay for their course. Some, however, do not like being in debt and once they start working, feel like they should pay back the loan as quickly as possible. However, this may not be the best thing to do.
Unlike most types of loans, student loans in the UK, have no interest charged on them while the student is doing the course. Once the course ends, whether they complete it or they drop out, the interest will start accumulating. This is because the government will cover the cost of the interest while the student is at university. Once they leave, it is assumed that they will get a job and therefore have the resources to repay the loan and the interest charges start to be added on.
Some students can earn a lot of money and could be tempted to overpay their loan or they save up so much that they could pay it off. This is not normally something that is recommended though.
A student loan works very differently to other types of loans. The repayments are not made using a direct debit form a current account like normal loans, but because it is organised by the government, the repayments go out through your tax code. This means that you will pay extra in tax and some of this will go towards repaying the money that you borrowed for university. The advantage of it being done this way is that it will not affect your credit rating as the loan does not show up on your credit record. This means that even if you want to take out a mortgage, there will be no disadvantage in having this type of loan. The amount you can borrow for a mortgage tends to be based on your gross income, which means your income before tax and so the student debt will not have an impact on this either.
The amount of interest charged is protected by the government as well as the amount that you have to pay. You make repayments as a percentage of your income. This means that only when you are earning over a certain amount of money will you need to start repaying the loan and therefore it should be affordable for you to do so.
Many people do not like the idea of being in debt though and would like to be able to pay the loan back early so that they no longer have the debt. However, they are usually advised not to repay early because it may mean that they are paying back more than necessary. This is because of the rules surrounding the loans. If you stop earning enough, then your requirement to make repayments will stop or reduce. There is just a thirty year window for repayments and then the loan will be written off. This means that you could find that you never earn enough or for long enough to be able to make all the repayments and therefore never pay back the loan in full.
There is nothing to stop you paying it all back, early and in full if you want to. You may feel morally obliged to do so and may feel that your course was really worth the money and you want to make sure that you have paid for it. However, other people may feel that it is fair that they pay back less if they cannot afford to make the repayments and therefore will only pay what they have to, in case they stop being able to pay in the future. It is hard to predict what might happen, but redundancy is always a possibility and stopping work to look after a family is another. If you have time out of work for whatever reason, you could stand to gain from not having to pay the loan repayments and it could mean that you end up paying less back than if you just paid it all off.
If you are confused, then it could be worth getting financial advice on this. The loan rules do change form time to time as well so you need to be completely sure of how it works in order to understand what the best way will be for you to manage your loan and its repayments. The government has been known to change the rules for those paying back loans in the present as well as for new borrowers, so it is wise to keep an eye on what is going on and any changes In the system so that you can assess whether any changes mean that you should change the way you are repaying.