New analysis by The Telegraph has shown that paying off your student loan early now could save you a significant amount of money in the long-run due to increasing interest on the loan amount.
Those who pay off the loan over 30 years will end up paying £20,000 more than those who pay it off over 17 years, due to interest.
However, considering that loans are written off after 30 years, paying off early may not be necessary. One second year student, Julian Sutcliffe, commented on this, saying that “although it may be cheaper to pay it off early, it’s far better to just pay it off at the minimum level because there’s a fairly decent chance you won’t pay it all anyway”.
However, as interest rates rise in relation to graduate salary, for those earning top figures, it may be worthwhile to assume you will pay it all back. Those earning over £41,000 pay interest of over 3%, while those earning £30,000 pay at least 1.35% (both rates also rise with inflation).
In addition, currently even relatively small voluntary contributions of £50 each month could ultimately save over £8,000. However, this may easily change if the inflation index used to calculate repayments raises from its near-zero level.
Alongside new research into interest rates, plans are currently underway to freeze the starting salary when paying back loans becomes compulsory and increase the rate at which loans are paid back. Announced in the Autumn Statement, the salary repayment level will be frozen, so in real terms it would become lower over time, due to inflation. Currently the rate of repayment is 9% of the amount earned over £21,000.
However, the Business Secretary Sajid Javid commented last month that the repayment rate may well rise, so graduates pay off their loans more quickly.
Although currently graduates only pay the 0% RPI plus interest, if inflation were to rise to the 4% level seen in 2011, anybody would need a salary of £52,500 or more to pay off more than just the interest on the loan, if paying the 3% interest rate for salaries over £41,000.
Will Tilbrook, an English student at Pembroke, commented: “Having the burden of a significant debt as an 18 year old is bad enough, let alone feeling under pressure to pay it back quickly as well.” He added: “I would much prefer to save for the future, rather than feel like I’m paying for the past.”
A spokesperson from the Student Loans Company said to The Telegraph: “Customers wishing to make voluntary repayments can do so in a number of ways. Debit and credit card payments can be submitted at any time online. Voluntary payments are non-refundable once received by the Student Loans Company.”