Students shouldn’t attempt to repay their loans early regardless of the controversial rate of interest rise to six.1% in September, in response to analysis by cash skilled Martin Lewis.
Lewis says his moneysavingexpert.com web site has been “swamped” by graduates terrified by new statements that present their debt spiralling in dimension after curiosity is added. He believes most graduates won’t ever repay their debt.
Lewis stated: “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 that “overpaying is just throwing money away” until the graduate is prone to be in very high-paid employment all their lives.
Only if the student lands a job incomes £40,000 a 12 months on commencement, after which enjoys massive pay rises after, ought to they contemplate repaying their loan early, stated Lewis.
A graduate incomes £36,000 a 12 months will repay £40,500 of a £55,000 whole student loan over 30 years, stated Lewis, on the present reimbursement charges. The remaining debt can be cleaned after 30 years. If the identical graduate cuts the whole £55,000 steadiness to £45,000 with an overpayment of £10,000, they’ll nonetheless need to repay the identical quantity of student loan over 30 years, making the overpayment completely pointless.
Student loan debt has been hovering and its whole worth rose above £100bn for the primary time earlier this 12 months, in response to figures launched by the Student Loans Company.
Lewis echoed findings from the Institute for Fiscal Studies earlier this month, which discovered the federal government must write off some or all the debt taken out by 77% of students as a result of they won’t earn sufficient to repay their loans inside 30 years of commencement.
“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+,” he stated.
“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.”
Unsually for Lewis, who resolutely steers away from any political positioning, his one-time function as head of the impartial taskforce on student finance data has led to accusations that he helps the system. He admits that student loans are a “political hot potato”, however insists that he has by no means endorsed the system, simply helped clarify 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,” Lewis stated.