A student loan is something that most full-time students have had to have for quite a while now. The loan covers the cost of the course and will also cover the cost of the students living expenses, or at least go towards those costs, depending on what their parents are earning. The higher the parent’s income; the smaller the amount of loan offered. This is similar to the old grant scheme in that students got a grant to cover their course fees but the amount they got towards their living expenses was determined by parental income and parents were expected to make up the shortfall.
The student loan system has got many people worried about debts and having the burden of repayments hanging over students for up to thirty years after they have completed the course. they feel that paying the loan back will allow the students to get out of debt and will help them to have more freedom. However, this is not normally necessary for a number of reasons.
How student loan repayments work
Student loan repayments are very different to other types of loans. They do not start until you are earning over a certain amount of money, which means that you will not have to pay anything back until you can afford to. The loan is also written off after thirty years, which means that you may not have to repay the full amount anyway. The repayments are taken out when you are paid through your tax code, almost as a student loan tax, This means that there is no chance that you will forget to pay or will not know when you have to pay as it is all calculated for you. It will also not show up as a loan when a company is doing a credit check, which could mean that it will have less of an impact on your credit worthiness.
Advantages of repaying early
Interest will accumulate on the loan over the years and this means that if you are going to repay the whole loan, that repaying it early will save you money. This because you will not need to repay so much interest and therefore the overall cost of the loan will be less. You will need to still repay the money that you borrowed though.
Some people feel that having a loan will make them feel stressed. Knowing that they owe money can be a feeling which is not good for some people. If this is the case with you, then paying I back early could really make a big difference to your stress levels and peace of mind. However, it is worth noting the disadvantages of repaying the loan early before you decide whether doing it is best for you.
Disadvantages of repaying early
There could be some major disadvantages of repaying your loan early. It is worth starting byy noting that almost three quarters of students never fully repay their loans. This is because repayments only start being taken once salaries are at a certain level and then the repayments increase as salary goes up but are capped. This means that some people never earn enough to make any repayments and many others will make some repayments, but not all of the time and they could be small ones. As the loan gets written off after thirty years, then anything outstanding at this time no longer needs to be paid. This means that if you pay it off early and then it turns out that you would not have had to repay it all, you actually lose out. It could be that you feel that you should pay it all as you have received the education after all, however you may feel that as the terms of the loan allow you to not repay all of it then there is nothing wrong with that. It is a very personal thing and most graduates would not worry about repaying their entire loan.
Normally this decision is purely financial. If you think that you will earn enough to repay your loan in full, then it will be in your advantage to repay it early if you can. This is because you will be charged less interest and therefore will repay less money overall. However, if you are unlikely to earn enough to repay the full loan, then if you repay it early, you will actually be paying back more than you have to. In this situation you will be financially better off to only make the necessary repayments and let the remainder of the loan be written off. There may be some other factors involved in your decision, such as those mentioned before, but the cost of the loan, is likely to be the thing that influences you decision the most.