27 September 2010

To Pay Or Not To Pay

For the 2010/2011 academic year, interest rates for student loans are now either 1.5% or 4.4%. The rate varies depending on when you took the loan out i.e when you first started university. If you started university between 1990 and 1997 then you will be subject to the 4.4% interest rate. After this the 1.5% applies, depending on whether the Bank of England’s base rate stays at 0.5%.

Interestingly statistics show that the number of outstanding loans for the latter, comes in at a whopping 3,300,000, with the old school 4.4% loan coming in with 355,000 outstanding loans.

We are now a whole generation of Britons with student loans as so many of us go down the higher education road. So what does it mean when people say that student loans have no real cost? This is said because there is no real interest cost because the most you will ever pay is the rate of inflation i.e the rate at which prices are rising. Therefore, a student loan is essentially very different from other commercial loans where you must pay back extra cash on top of inflation rates.

To question is then is it worth paying back your student loan? An article I read today argued that in actuality, you are much better off putting that monthly payment into a high interest savings account, or into another investment because over a ten year period, you would have earned back enough money to pay off your loan, and more. The article was saying that you should prioritise those things with higher interest rates such as credit card bills and bank loans as your student loan is not going to gather much interest at all. Low interest loans do not need to paid off quickly; even if they sit unpaid, they will not collect a huge amount of interest at all. You might be better off not paying it off in this case.

It is something to think about anyway before you go rushing into paying off that student loan...

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