Recent research has shown that UK students “shouldn’t try to pay off loans early,” unless they get a starting salary of £40,000 and get pay raises continually following their first job.
According to recent research, students in the UK should not try to pay off their student loans early. According to Martin Lewis, the money expert who led the research, despite the interests on student loans rising to 6.1 percent in September, this isn’t something they should do.
After some analysis, Lewis estimated that “overpaying is just throwing money away.” He said that this is unless the said student will likely end up in a high-paying job their entire life. He said that a student would have to land a £40,000 annual-salary job after graduating, and then get big raises after, in order to pay their student loan early.
If a graduate earns £36,000 per year, he would end up paying £40,500 from a £55,000 overall student loan in approximately 30 years. If that same graduate student cuts this total to just £45,000 and overpays £10,000, he would still have to pay the same amount over 30 years. Therefore, he says that overpayment is worthless.
What He Said
Lewis said: “Many graduates are starting to panic. First they look in shock at their student loan statements after noticing interest totalling thousands has been added. Then they read the headline interest rate for the 2017-18 academic year will increase from 4.6% to 6.1%. It’s no surprise I’ve been swamped with people asking if they should be trying to overpay the loans to reduce the interest.”
He also said: “Most graduates won’t come close to repaying 6.1%. Not just for the obvious reason that the interest is only that high for those earning £41,000+. More potently it’s because what you owe [your borrowing plus interest] doesn’t change what you repay. That’s fixed at 9% of everything earned above £21,000.”
“I’m tempted to say ‘rip up your student loan statement’ – it’s just frightening and irrelevant. Just accept you’ll pay a 9% increased tax-like burden. For most university leavers, the term ‘student loan’ is a misnomer – it should be renamed the more accurate term: a ‘graduate contribution’ system. That doesn’t mean it’s cheap or fair, simply that people would make better financial decisions if they focus on the fact they’ll have to pay the equivalent of 9% extra tax above £21,000 for 30 years,” Lewis said.