Should I Pay Off My Student Loan Early?

Cambridge University by Christian Richardt

Paying off debt in any form is usually a good idea as it will reduce the amount of dead money being spent on interest over a life time leaving you more money to spend on the important things in life.  However, if you took out a loan in the UK with the Student Loans Company (SLC) there may be some good reasons not to pay off your student loan early.

Consider the Cost of an SLC Student Loan

The main reason not to payback a student loan is the fact that it will probably be your lowest costing form of debt and therefore should be the last priority in comparison to other forms of debt.  The rate of interest paid will depend which scheme you borrowed under but rates on the whole tend to be lower than other commercially available sources of finance.  As such, if you have any outstanding debts including a mortgage which have a higher rate of interest, pay these off first.

In some years and on some schemes this can mean that you may even be able to make more money in interest in a high interest savings account than you would by paying off the equivalent amount off your student loan.  If this is the case, keep your money to hand.  Here are some examples of the cost of debt at the start of 2012:

·         SLC Student Loan (Issued 1998-2011) – 1.5% APR

·         RBS Platinum Card – 17.9% APR

·         RBS Unsecured Personal Loan – 8.9% APR

·         HSBC Tracker Mortgage – 4.7% APR

·         Lloyds TSB Cash ISA – 2.35% AER

The Unique Features of an SLC Student Loan

There are also some other reasons why you may wish not to pay back a student loan early despite the cost savings in interest:

Expiration – A unique feature of the SLC student loan is that the debt expires after 25 years, this means that if you don’t payback all of the money after 25 years the remaining balance will be cancelled.  In short it may not be worth paying back more than the minimum if you believe that after 25 years you will still have a significant outstanding balance.

Unsecured Borrowing – Another key feature of the SLC student loans system is that the debt is not secured against any of your personal assets and mandatory collections only take place through the PAYE system and self assessment.  In short, unlike other forms of debt no one will come knocking on your door demanding payments, the repayment system is much like an additional tax band in effect.  As such it may be better to tackle secured forms of borrowing first.

Credit Rating – At present SLC student loans are not shown on the reports generate by major credit reference agencies such as Experian.  As such, having an outstanding student loan should not affect your credit rating which is important when trying to obtain credit for other ventures such as getting on the property ladder.

Final word, it’s always good to pay off debt and paying off an SLC student loan early is unlikely to do you any harm.  However, do your homework first, if you have other outstanding forms of debt, the cost of a student loan and unique terms and conditions are unlikely to make this the best option for early repayment.  Even if you have no other forms of debt, check carefully that there aren’t better alternative investments for your money before paying off your student loan.