Students should not try to pay off their loans early despite the controversial rise in interest rate to 6.1% in September, according to research by money expert Martin Lewis.
Lewis says his moneysavingexpert.com site has been “swamped” by graduates terrified by new statements that show their debt spiralling in size after interest is added. He believes most graduates will never repay their debt.
Lewis said: “Many graduates are starting to panic. First they look in shock at their student loan statements after noticing interest totalling thousands has been added. Then they read the headline interest rate for the 2017/18 academic year will increase from 4.6% to 6.1%. It’s no surprise I’ve been swamped with people asking if they should be trying to overpay the loans to reduce the interest.”
But after crunching the numbers, Lewis estimates “overpaying is just throwing money away” unless the student is likely to be in very high-paid employment all their lives.
Only if the student lands a job earning £40,000 a year on graduation, and then enjoys big pay rises after, should they consider repaying their loan early, said Lewis.
A graduate earning £36,000 a year will repay £40,500 of a £55,000 total student loan over 30 years, said Lewis, at the current repayment rates. The remaining debt will be wiped clean after 30 years. If the same graduate cuts the total £55,000 balance to £45,000 with an overpayment of £10,000, they will still have to repay the same amount of student loan over 30 years, making the overpayment entirely pointless.
Student loan debt has been soaring and its total value rose above £100bn for the first time earlier this year, according to figures released by the Student Loans Company.
Lewis echoed findings from the Institute of Fiscal Studies earlier this month, which found that the government will have to write off some or all of the debt taken out by 77% of students because they will not earn enough to repay their loans within 30 years of graduation.
“Most graduates won’t come close to repaying 6.1%. Not just for the obvious reason that the interest is only that high for those earning £41,000+. More potently it’s because what you owe (your borrowing plus interest) doesn’t change what you repay. That’s fixed at 9% of everything earned above £21,000.
“I’m tempted to say “rip up your student loan statement” – it’s just frightening and irrelevant. Just accept you’ll pay a 9% increased tax-like burden,” he added.
Unsually for Lewis, who resolutely steers clear of any political positioning, his one-time role as head of the Independent Taskforce on Student Finance Information has led to accusations that he supports the highly controversial system. He admits that student loans are a “political hot potato” but insists that he has never endorsed the system, just helped to explain it.
“For most university leavers, the term ‘student loan’ is a misnomer – it should be renamed the more accurate term: a ‘graduate contribution’ system. That doesn’t mean it’s cheap or fair, simply that people would make better financial decisions if they focus on the fact they’ll have to pay the equivalent of 9% extra tax above £21,000 for 30 years.”