Should you pay off your student loan?

January 23, 2013

If you’re a recent graduate and have been lucky enough to have entered the world of work, you may be wondering whether it’s a good idea to pay off your debts or not.

Anyone who commenced their higher education any time between 1998 and 2011 probably has what is termed an “income contingent” loan.

So if you have a lot of spare cash all of a sudden and think it’s wise to start engaging in a little debt management of your own; paying down your debts as you want a clear head – then you may think it’s wise to clear the decks.

But you’d be completely wrong. The current interest rate for the debt on this type of student loan is just 1.5%. This rate of interest for the year starting from 1st September 2012 in the UK is calculated on the Bank of England base rate (which is currently just 0.5%) plus 1%. This changes each year – so do keep an eye on the rates.

The fact is that you can beat this kind of paltry repayment interest hands-down even in the safest of investment vehicles like a building society or bank account if you hunt around. So you don’t have to be a maths graduate to realise that – though the difference between the interest you can receive and that which you’re paying is fairly small – it still makes no numerical sense to pay it off.

Also – the student loan should very probably be the last one you pay off if you have any other types of debt – and particularly credit card debt which you should do all you can to clear and as soon as you possibly can.

And if you are generating surplus cash with the rest of your career ahead of you – it’s probably wiser to consider some form of equity-based investments as these have tended to better over the long term.