Should I Pay Off My Student Loan? What Are The Best Accounts Out There?

[JoeDavola]

As alot of you will know, from September they will be doubling the interest rate on student loans...to something like 4.4% I believe?

I have enough money in my account to pay my student loan off in full - however would it be better to keep it and stick it in a high interest account? I still havent got round to taking out an ISA for this financial year so I'll do that - any reccomendations for accounts?

What are the best high interest accounts out there? Should I be able to make more than 4.4% on my savings after tax?

[Jason]

Unless you pay a high rate of tax (40%) I wouldn't pay off a student loan (I still have one). As long as you get above 4.4% NET or 5.5% GROSS your quids in.

Loads of accounts pay above 6% now, an ISA will be even better for you too.

[Disillusioned]

Unless you pay a high rate of tax (40%) I wouldn't pay off a student loan (I still have one). As long as you get above 4.4% NET or 5.5% GROSS your quids in.

Loads of accounts pay above 6% now, an ISA will be even better for you too.

Exactly what I was going to say.

[christhpc]

Hi Joe,

It'll be 4.8% from September this year. It's based on the RPI for March. Bit of a leap from 2.4%, but that's the nature of the beast.

As with many other people on this forum, I'm extremely debt-averse, but taking all emotion out of it (argh! going from £240/yr interest to £480/yr interest on a £10,000 balance!) if you have an ICEsave account - currently paying 6.2%, so net that's 4.96%. So by having your money in ICEsave rather than paying off your loan early you're earning 0.16% more.

Not a lot in it, but hopefully next year the rate will be more favourable. Really though, in recent years we've been very lucky with the loan rate, we'll just have to suck it up this year. Don't forget to use your cash ISA allowance either.

Edited August 28, 2007 by christh

[Guest muttley]

May I venture a different opinion?

The psychological advantages of paying off your loan will far outweigh the few pounds you will save in keeping it on. I'm not debt averse, but I believe that paying off this loan will draw a line under your student days, and actually empower you towards a better future. Don't spend your life eeking out better rates on bank loans and stoozing on credit cards. Better to re-evaluate your life and concentrating on your career/ family/ earning power/ whatever floats your boat. The feeling of being in control of your finances is definitely worth a premium.

[JoeDavola]

Thanks for the replies everyone.

Muttley, thanks for your post - the reason why I was considering keeping it was not to make money via higher interest rates, but so that when I did need the money, say a few years down the line to buy a house, it would be available at a low interest rate.

Though part of me is still considering paying it off so that I know that I don't owe anyone a penny - I think that would be a good feeling to have.

[asquithea]

I graduated in 2003 with about £9000 owing. I had intended to use it towards a house deposit, but in practice my income and combined deposit couldn't match the rising market (no surprise there). Yesterday, with a decent amount in the bank but no particular inclination to buy, I just repaid the balance of my loan. I didn't need the extra money anymore, and it was my only debt.

If I were in your position, I'd keep the money if you think the lump sum might be useful, but reevaluate later. With that rate rise, you won't really make any money off it, but having some extra cash in your account saves you from ever needing to fall back on more expensive credit to cover a short term cash-flow problem. Pay it back when you don't need it anymore.

[Guest happy?]

Thanks for the replies everyone.

Muttley, thanks for your post - the reason why I was considering keeping it was not to make money via higher interest rates, but so that when I did need the money, say a few years down the line to buy a house, it would be available at a low interest rate.

Though part of me is still considering paying it off so that I know that I don't owe anyone a penny - I think that would be a good feeling to have.

You're asking yourself the wrong question. You've posed the question as either/or and this is a false dichotomy. You have money in the bank which will clear your debt. Some factors which you should consider:

1. Will the net interest on my savings exceed the interest on the loan?

2. Does the total sum of my savings prevent me having access to state benefits if I become unemployed? If so, what's the figure I need to get below?

3. How easy is access to credit if I need it?

This latter point should be considered carefully. Easy credit has been around for a long time but we now face a credit crunch - lending will be harder to get and will be more expensive. But you already have money in the bank and access to a ready low-cost source of credit - your student loan.

Something you could consider - paying down part of the loan, and putting the rest into savings. This permits you have to access to some money should a rainy day come along. Firstly, you should make full use of your cash ISA allowance (now £3k rises to £3600 from April 2008). Secondly, you could trickle the rest into high interest regular savings accounts - the Yorkshire BS is paying more than 7% on up to £500 per month at the moment and most others are offering about 6.8%.

It's important to recognise that that either/or is not the answer and keeping options open may be your best position. You can then review your situation in a year or two when your earnings have increased.

Edited September 7, 2007 by happy?