I have a confession to make: I made a mistake.
When I first started blogging, I’d been reading a lot of personal finance blogs. Like, a lot. And most people have a similar story: they buckled down, learned how to be frugal, worked hard, and paid off their debts in a matter of months. Amazing.
Reading these stories, I was inspired. I thought, yes, this is what I’m going to do – I’m going to start making real money with my copywriting career and I’m going to tackle my debts! My debts, by the way, are student loans.
I even wrote an article about why I wasn’t focusing on repaying them now, but would be in the future!
So, what’s the mistake?
Well, these bloggers all shared one thing in common: they’re from the US.
I, on the other hand, am from the UK. After a lot more reading in the past few weeks, I’ve learned that my student loan debts are completely different from the US. As in, repaying your debts quickly (we’re talking only student loan debt here) is a pretty bad idea.
Why You Shouldn’t Rush to Pay Off Your Student Loans if You’re in the UK
Martin Lewis makes outlines this topic in a brilliant article over on his site Money Saving Expert. He also explains why this may not apply to you if you went to a UK University after 2012. I highly recommend checking out his site.
I’m going to cover the main points I’ve found in his article and the many other ones online echoing the same arguments.
Student Loan Debt: How Much Do You Owe?
If you started University in 2011 or earlier as a full-time student on a 3-year course and also took out a maintenance loan every year, you’ll graduate with around £25,000 of debt.
This is a very rough estimate based on the average tuition fee and maintenance loans, and doesn’t take into account the interest you start earning on your loans as soon as you are due to repay them! Login to your account with the Student Loans Company to see exactly how much you owe (and don’t let the number scare you – read below to see why!).
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Student Loan Debt: How Do You Repay It?
In the UK, you repay 9% of everything you earn above £17,775 a year. If your earnings are below this threshold, you pay nothing.
If you’re employed, that money is automatically deducted from your pay each month, same as tax. You never actually pocket that money and don’t have to submit payment yourself.
If you are earning over the threshold and see that payments aren’t being deducted for your student loan repayment, it’s your job to tell your employer – it’s not their responsibility.
If you’re self-employed, you’re responsible for notifying HMRC of your payments when you do your self-assessment form.
Can You Overpay Your Student Loan Debt?
Yes, you can submit more than 9% per year to pay your student loans off quicker if you want. You just need to visit the Student Loans Company for more details and can pay via card, bank transfer, cheque.
Here’s why you shouldn’t:
No Impact on Credit Files
Student loans have no impact on your credit rating if you started University between 1998 and 2011. While late payments to credit card debt and other loans can hurt your credit rating, your student loan debt is not included in your credit files.
When (if) you apply for a mortgage, credit card or a loan in the future, the lender will only know if you have student loans by directly asking you on the application. Your student loans do not affect your credit rating and will not show on any report.
There’s no ‘real’ interest cost
At the highest, you’ll only ever pay the same amount of interest as the rate of inflation. However, the amount you owe in student loans + interest will never impact how much you need to repay each year. You will always pay 9% of your earnings once you are over the earning threshold, and those debts will be wiped out after 30 years regardless of what you owe.
You only repay if you earn enough
Once you earn over £17,775, you have to pay 9% of what you earn over that every year. However, until you earn £17,775, you don’t have to pay a thing. If you lose your job and are suddenly back below the threshold, your repayment automatically stops – and no one is coming to collect any debts until you’re back above the threshold.
If you overpaid in the years you were above the threshold, you will have lost access to cash that could be extremely useful to you if you are suddenly unemployed or in a change of circumstances.
Debts are automatically wiped out over 30 years
All UK student loan debts are automatically wiped out after 30 years or upon your death. This is important because it means your debt isn’t inherited or passed on with your estate after you die.
This factor is key – if you have paid more of your student loans than you need to and suddenly go back below the threshold, are incapacitated or die, you will have unnecessarily paid more money than you needed to.
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What to do instead:
As you can see, there are a lot of reasons why paying off your student loan debt at the standard rate works in your favour. While being able to achieve ‘debt free life’ may sound enticing, your student loans are an entirely different kettle of fish to standard loans.
Instead of rushing to pay off your student loan debt, try these alternatives:
Prioritise other debts
Focus on the higher interest rate debts that you have first. Credit card, loans, mortgages or any other kind of debt is extremely likely to be costing you more than the 1.25% of student loan interest charged, so focus on getting them paid off first.
Save, Invest, Use the Cash
Even if like me, you’re debt-free except for your student loans, rushing to pay them off is not the best use of your money.
- You can earn more interest in a savings account each year than the cost of interest added to your student loans
- You may need that surplus cash for future debts – loans, mortgages etc. Student loans don’t need to be repaid if your income drops, but other debts do – keep the cash for times like this.
Lewis states that unless you’re very likely to be in very high-income employment for all of your life, over-paying your student loans is throwing away money that could be put to much better use.
So if you’re debt-free in every other area of your life other than your student loans, start saving! You’ll be paying 9% of your income once you’re over the threshold regardless, so start budgeting now and putting your cash into a high-interest savings account, or look into investing – not something I know a whole lot about, so not something I want to comment on too much!
That money will be valuable in the future, whether you need a down-payment for a mortgage, want to invest, start a business (or a family!) – whatever. Keep the cash and don’t throw your money at student loans when you don’t need to.
*If you started University after 2012, this article will not apply to the new rules your student loans are associated with! I highly recommend you check out this article to find out what applies to you.
After finding all of this out, I felt free. My student loan debt has been an enormous shadow over my head since I graduated, with each repayment notice with rising interest sending my stress-levels sky high.
Now though, I’ve realised that I’m debt-free where it matters. I have manageable student loan debt that will be paid each year, but I don’t need to rush to pay anything off because I don’t have any other debts. I’ve never leased out a car, don’t use credit cards to fund my lifestyle, and I’m looking for alternatives to having a mortgage until I’m in a better financial position. I feel like I’ve accomplished something by doing nothing!
I really hope this helps you, if like me, you’re UK based but were confused about what to actually do with your student loans.
Now, it’s time to get frugal and build up that savings account for the financial independence journey to get really underway…
Check out these articles to get started!
- 15 Practical Changes That Could Save You Up to £9,500 This Year
- 50 Frugal Activities Ideal for No Spend Weekends
- Start Your Own Freelance Business: What You Need to Know
- 60+ Side Hustle Ideas to Make Extra Money From Home
- How to Land Your First Freelance Clients