UK student loans, early repayment/avoiding further debt

Question

I'm a current student at a university in the UK partway through my course. I've accumulated £21k of debt so far. The loan interest rate increases with inflation, and will be at over 6% next year (worse than any bank loan although I admit the repayment terms are more favourable).

I'm considering doing (some) early repayment during a year in industry next year. I've seen a lot of advice discouraging this, but my thoughts are:

• The interest will likely to continue to increase with inflation. The total balance is increasing now whilst I'm studying, and since it's compound intereast it's better to pay now than later when I'm forced to.
• Paying off the student loan is better than placing money in an ISA where the interest rate is, say 0.25%. By paying money off from the loan I'm 'saving' myself from being taxed on that amount at a rate of over 6%

I'm also considering foregoing taking the tuition fee and maintenance loans for the final year of the course which should further reduce the balance I have to pay off. Instead, I'd pay these up front.

It is likely I will pay off the entire loan balance (even paying the mandatory amount with no voluntary payments) once I graduate - so ignoring the loan doesn't seem like a good idea, even with the policies on automatic forgiveness after 30 years. It will just accumulate more interest which I will have to pay via taxes - money I could eventually put towards mortgage repayments.

I'm aware that this debt is not like credit card debt. It's not particularly nice psychologically to see the total balance though!

Are any of my conclusions incorrect - does this approach make sense?

Answer 1

I think you're right that from a pure "expected future value" perspective, it makes sense to pay this loan off as quickly as possible (including not taking the next year's loan). The new student loans with the higher interest rates have changed the balance enough that it's no longer automatically better to keep it going as long as possible.

The crucial point in your case, which isn't true for many people, is that you will likely have to pay it off eventually anyway and so in terms of net costs over your lifetime you will do best by paying it off quickly.

A few points to set against that, that you might want to consider:

• Not paying it off is a good hedge against your career not going as well as you expect, e.g. if the economy does badly, you have health problems, you take a career break for any reason. If that happens, you would end up not being forced to pay it off, so will end up gaining from not having done so voluntarily.

  The money you save in that case could be more valuable to you that the money you would lose if your career does go well.

• Not paying it off will increase your net cash earlier in life when you are more likely to need it, e.g. for a house deposit. Having more free cash could increase your options, making it possible to buy a house earlier in life.

  Or it could mean you have a higher deposit when you do buy, reducing the interest rate on the entire mortgage balance. The savings from that could end up being more than the 6% interest on the loan even though when you look at the loan in isolation it seems like a very bad rate.