Student debt: what should you do about the elephant in the room?

By Hayley Hemmings

Does the thought of paying off your student loans when you’re in your forties or fifties keep you awake at night?

It’s a thought that plagues some former students it seems. More than a third of millennial graduates regret going to university, given the amount of debt they’ve accumulated, according to this article in the Guardian.

If you’ve left university with student loan debt, whether it’s bothering you or not, you might at the very least be wondering what you should do about it.

Should you try to overpay your student loans to get rid of them as quickly as possible, or just forget about them so that the repayments are discreetly plucked from your pay packet for the next couple of decades?

It’s a question that millions of ex-students want to know the answer to. If you started university pre-2012, then your student debt balance won’t be anywhere near as heavy as those unlucky souls graduating today who may be walking away with an average £44K of student debt!

But either way, it’s good to know the key facts about student loan debt and whether it’s something you should be worrying about.
The way student loans work depends on when they were taken out, so for the purpose of this post, I’ll be covering some key facts specifically about pre-2012 student debt (plan 1). This is during the blessed time when tuition fees were in the region of £3K per year. (Today, universities can charge up to £9K per year).

New student? If you need to know key facts about university fees for 2016 starters, check out this very helpful article from Money Saving Expert.

Things you’ll want to know about pre-2012 student loans

Between 1998 and 2011, student loans from the Student Loans Company (SLC) worked on an income related model, much like it does for new graduates nowadays. This means that the amount you have to repay is relative to the amount you earn – and you’ll only need to repay once you earn over a certain amount.

Here are some FAQS on pre-2012 student debt answered below:

How do student loan repayments work?

Once you earn over £17,495 per year, that’s when your student loan repayment will kick in. You’ll need to pay 9% back of everything you earn over that amount per year to the SLC.

As an example, if you’re earning £20,000, you’ll need to repay £225.45 per year. If you’re earning £35,000, you can expect to have to repay £1,575.45 per year.

So, if you’re earning less than £17,495 per year, you won’t have to repay anything at all.

Are interest rates on student loans good or bad?

The current interest rate for the academic year starting in September 2016 is 1.25% - so extremely low, when you compare this rate with the rates you see on credit cards and personal loans.

The interest rate is set every August and is either based on March’s inflation rate, or the Bank of England base rate plus 1% - whichever is the lower rate.

How are student loan repayments taken?

If you’re employed, your student loan repayments will be taken out of your wages just like tax and national insurance does. This is useful because you won’t ever really notice the dent in your wages that your student debt is causing and also, quite cleverly, you’ll never be able to miss a repayment!

If you’re self-employed, you’ll need to let HMRC know about your student loan repayments when you come to do your self-assessment tax return.

Does having student debt impact on your credit file?

Unlike other forms of debt like credit cards and personal loans, your student loan debt won’t be included on your credit report, so you won’t need to worry.
However, when applying for a mortgage, you may need to let your lender know about your student loan repayments, because of the fact that they will leave you with less take-home pay.

The million dollar question - should you overpay your student loan debt?

When it comes to student loans, the key consideration is how much you’ll need to actually repay, rather than how much you owe in total.

The first thing to note is that your student loan debt will be wiped after so many years (25 years if you started university between 2006 and 2011), or if you pass away beforehand. Contrary to popular belief, other debts don’t just die with you – but student loans do!

As a general rule, it’s always better to overpay debt rather than save your money, because of the interest involved (usually the interest rate of borrowing is higher than the amount of interest you could earn through saving). But this is where student loans are a bit different.

In most cases, it doesn’t actually make sense to overpay your student loans because the cost of borrowing is so low. Anyone starting university pre-2012 will be paying an interest rate that matches the rate of inflation.

If you have some extra cash to spare, it might be worth stashing the money away in a high-interest savings account or in a carefully chosen investment because you’ll probably get a better return on your money.

Alternatively, if you have other debts with higher interest rates, it makes mathematical sense to focus on paying these off first. And when you get a mortgage, you’d probably be better off overpaying that, rather than your student loans – that’s provided you won’t be hit by any penalties for overpaying a mortgage!

With all that said, you might find overpaying your student loans beneficial if you’re earning a very high salary and are already making some high repayments. In that case, if you can see your situation remaining the same for the foreseeable future – and you’ve already paid off other debts – then it might be worth overpaying your student loans.

And, if the thought of carrying student loan debt is really bothering you, then by all means, start overpaying it. Sometimes the psychological benefits of becoming debt-free make more sense than mathematical logic!

Check out this in-depth guide for more information on whether you should overpay your student loans or not.

How to overpay your student loan

If you do want to overpay your student loan, here’s how to do it. Providing your student loan is from the SLC, you can make an overpayment whenever you want by card, cheque or postal order.

Voluntary payments aren’t refundable, so be sure that you can definitely afford the overpayment first. More details on how to make a payment are available via the SLC repayment portal.

Top Takeaway

It’s an unsettling thought to have pesky student loans hanging around your neck, because at the end of the day, debt is debt. No-one really likes owing money, right?

However, student loan debt is one of the most cost-effective forms of debt you’ll ever have – and as you’ll have come away with a university education, it’s classed as a useful form of debt.

If you have spare money to use to get your finances into a better place, it makes mathematical sense to deal with your student loans last, after you’ve paid off all other debts and built up some decent savings.


Do you have student loans? How do you feel about them?

Author Bio: Hayley Hemmings is a freelance writer, blogger and tea addict from Yorkshire. She’s passionate about money matters, frugal living and loves anything handmade. When Hayley’s not writing, she’s most likely to be found enjoying snuggles with her little girl or walking her border collie through the beautiful Yorkshire countryside.  

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