If you have a student loan, then you might be tempted to repay it early. There are different types of student loan and so what you do can depend on the type that you have if you have a career development loan or similar, then these can be expensive and you might want to consider paying these off early to save interest, they will also have to be repaid in full. If you have one of the original student loans then these may be better off being repaid early as well. The more recent type of student loans work very differently and it is these that we will focus on as they are the most common.
How do the loans work?
A student loan does not work in the same way as a traditional loan. All people are entitled to borrow money to pay for four years of study to cover the course fees (unless they have had a grant or loan in the past for study). The household they live in is also means tested and they may get money towards living expenses as well if it is thought that the family is not well enough to be able to afford to pay it. After the course is finished, the loan will need to be repaid. The repayments are taken out in the graduate’s tax code and is means tested so they only have to make repayments once earning over a certain amount of money and this will change depending on how much they earn and be capped at a certain level. After thirty years the debt is written off so anything remaining that they have not paid will never have to be repaid.
Advantages of repaying early
Interest is charged on the loan which means that the longer it takes the graduate to repay the loan the more interest they will be charged. So if they repay it early, hey will save that money that they would have paid in interest. Although the loan does not have an impact on your credit record, it can be an influence when you are taking out a mortgage. This is because a mortgage lender will not only look at your income but also take into account how much disposable income you have, which means how much money you have to spend, once taxes etc have been taken out of your pay. They will want to make sure that you have enough money to cover all of your bills as well as the mortgage repayments and so the fact that you are taxed more highly to repay the loan could have an impact and therefore if you have repaid the loan, this could help.
Disadvantages of repaying early
Repaying the loan early is a risk as you might be repaying more than you actually need to. As anything that you do not repay by the end of thirty years is written off, it means that you could repay more than necessary. This will depend on your circumstances though. If you go into a career that pays highly, then you could start repaying right away and you may easily repay all of the loan before the thirty years are up and therefore it will be better to repay it early if you can However, if you have low paid jobs, work part-time or even take time out of work (perhaps to care for family) then you will not be repaying it all the time and there is a greater chance that you will not need to repay the whole amount. You therefore need to try to predict which will be the best option for you.