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5 reasons I decided to pay off my student loans early
Student loans in the UK are rarely considered proper debt. Having a student loan doesn’t affect your credit score, and no one’s going to come knocking on your door if you lose your job and can’t make a loan repayment. Even better: at some point in your life, they just disappear!
Compared to US graduates who are often saddled with eye-watering levels of student debt they must actually pay back, we have it much easier in the UK.
Because of these favourable conditions, most UK graduates are quite happy to ignore their loans for the most part, chipping away at them gradually through their monthly earnings, as long as they earn above a certain threshold. And if they don’t earn enough, then no payment needed.
However, for a number of reasons which I’ll outline below, I’ve made the conscious decision to overpay each month to get my loan down to a level I feel more comfortable with.
There is a strong case for NOT repaying student loans early
Martin Lewis says overpaying a student loan is “just throwing money away.” I wholeheartedly agree in most cases. Especially with newer graduates coming out with debt upwards of £50k. They should put their extra money elsewhere: investments, pension, a mortgage, or just doing whatever the hell they want until the majority of the debt is wiped out.
For anybody confused about student loans, I suggest you read Martin Lewis’ guide on student loans. Loan conditions have changed considerably since they were introduced in 1990, and it’s important to know what the conditions of your loan are based on what year you started university.
The guide sets out a very clear and convincing case for why graduates shouldn’t consider paying off their loans early. But it was also as a result of reading the guide several times that I decided that it was right for me to try and pay my loan off early.
How I racked up £19,000 in student loans
I feel lucky to have entered university in 2005 before university fees skyrocketed. That said, I took on a larger loan than most of my peers: I took a four-year degree instead of a three-year, and I went to university in London, meaning that I was eligible for a larger loan.
This is rather embarassing, but I have no idea how much I actually borrowed in the end. Maybe £15,000, maybe more. Correspondence from the Student Loans Company (SLC) was infrequent, and when it did come in, I largely ignored it.
Unlike my friends who went straight into conventional jobs, I didn’t cross the earnings threshold and start re-paying my loans until about three years after I graduated. I remember the heart-sinking realization that my repayments weren’t even covering the interest (I was only repaying about £27 a month; the interest was £42).
But I shrugged it off, and soon stopped making payments again when I started my Masters and then moved to Asia. I wrote to the SLC to tell them I was abroad (there’s a hefty fine if you don’t), and each year sent them documentation to show I still wasn’t earning enough to make repayments.
But soon after my financial epiphany, I decided it was time to at least acknowledge my student debt. Despite my efforts to ignore the loan, the fact that it was growing month by month was somewhere still in the recesses of my conscience.
Since I had probably only qualified to make student loan repayments for about a year of my career, the loan had rapidly compounded to over £18,000 in eight years. Ouch.
I got it down to under £5k!
I didn’t start making repayments on my loan until 18 months after trying to turn my finances around. At the beginning of 2015 I decided to start with a monthly payment of £100, occasionally throwing in a few additional hundred every time I transferred money home.
At some point I got frustrated at the slow pace, so I started throwing £500 a month at the loan before finally scaling my contributions down to £150. This is just slightly higher than what I have to pay monthly anyway now that I have a salary that makes me eligible for repayments.
My loan is now down to around £4,800, which means that over the course of three years I have knocked £12,000 off my student loans. Over half of that was made up of voluntary early repayments.
I swear I have good reasons…
Debt repayment is usually something to celebrate, but as explained above, UK student loans are a peculiar sort that shouldn’t be repaid early.
Now before Martin Lewis and other UK financially savvy folks shout at me for throwing over £6k away, I’d like to outline my (mostly) rational decisions for doing so, bearing in mind my case is slightly different to most, and that we all deal with debt in our own way:
1. I could no longer invest or save in higher rate accounts
I had been sending my savings back to the UK and investing them in a stocks and shares ISA and pension. But due to my non-UK resident status, I had to stop making contributions after a while. I looked into opening another high-interest savings account, but again non-residency made it complicated. Given that my existing savings account pays 0.25%, and my loan is compounding at 1.5%, it seemed like one way of making sure my money wasn’t being completely eroded by interest. And while paying down this debt, I still made sure I was putting a healthy amount aside for an emergency fund, and a small freedom fund.
2. I’ll have to pay off my entire loan anyway
Unlike graduates who entered uni from 2006 onwards and whose loans get wiped after only 25-35 years, my loan won’t get written off until I’m 65 years old. I’ve still got another 30 years to go!! Between now and then, it’s highly likely I’ll have to pay off the loan in its entirety, plus all the interest it has accumulated. If I hadn’t paid off the extra £6,000, that money would have kept compounding over time, meaning I would have paid more in interest. I’d like to math this shit up Millennial Revolution-style to convince you that this has saved me money over the long-run, but I can’t be sure I’ll do it right (I like personal finance, but maths is not really my thing :p).
3. I have little faith in the SLC
There are numerous horror stories about the SLC getting things wrong and penalizing graduates for no good reason, especially with graduates who move abroad, or those who’ve accidentally overpaid. I have major concerns about their general competence. On one occasion, I renewed my direct debit by post (since they still don’t do email), and they wrote me a letter months later to tell me they received my request, but didn’t have my bank details – which were already on the system, and on the reverse of the request form they had just acknowledged! The sooner I can stop dealing with the SLC and their potential errors, the happier I’ll be.
4. My loan has been sold off
I always felt morally bound to repay my student loan because I owed it to the government and fellow tax-payers. But recently the Tory government sold a large portion of the student loan book to the private sector (at a loss). I received a letter earlier this year confirming my loan was part of the sale. So now I owe god-knows-who several thousands of pounds. Although the loan conditions are supposed to stay the same, I feel less secure about owing money to the private sector, so the less money I owe, the better.
5. It just feels good, ok?
Seeing the loan grow each month really made me quite depressed. Most of my friends had already paid theirs off through their monthly pay, whereas here I was with my student loan still sitting around my neck. The thought of carrying that round with me for the next 10+ years was even more depressing. Frankly, slashing my loan down to just one quarter of what I owed 3 years ago is much more valuable to me than whatever financial gains I may have gotten by directing my money elsewhere.
My experience tells me we shouldn’t underestimate the emotional burden of debt, even if we know rationally that UK student loans aren’t regular debt. So I really do sympathise with newer graduates who need to take on loans. Sure, most of them will never have to repay them in full, but it seems unfair to saddle the younger generation with massive student debt alongside ridiculous house prices.
In principle, I still believe graduates shouldn’t make efforts to repay their loans early. But not every case is the same, and I think I have made the right choice – at least emotionally – to repay my loans early. Time will tell if this was a good financial decision.
What do you think about UK student loans? Have you paid yours off already? Let me know in the comments!