Loans For Students

    • Student debt ≠ Personal loan
    • Student loan really a tax
    • Payment rules very different
    • Not included in your credit file
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Personal Loans For Students

We have a lot of students coming to our website looking to see if they should pay off their student loan (tuition fees and maintenance loans) with a personal loan. [note: if you need a small cash loan click here]

It is easy to become concerned about accumulating student debt allied to a headline interest rate of RPI + 3%. However, there are major differences between standard debt and student debt (see the panel).

Given the way student debt works should you pay it off? And if you should then should you borrow on commercial terms to do it?

 

Students at University

Student Loans info

These are the basic principles of a student loan:

  • You only repay once your income rises above a threshold
  • Your repayments only rise if your income rises
  • Payments are deducted directly from your salary
  • If you lose your job your repayments stop
  • Debt is wiped out after 30 years
  • More of a graduate tax than a debt

Why a Student Loan is not like a Personal Loan

Student Loans

The basics of a student loan:

  • Your loan can include study fees and living expenses.
  • Interest starts accruing as soon as the money arrives in your account
  • The interest rate is the same for all students – it does not depend on your credit rating
  • Your repayments and your loan details are not reported to credit reference agencies
    • so your credit rating is not reduced because of this debt
  • Repayments only start once your income reaches £26,575 (2020/21)
  • You will only pay back 9% of whatever you earn over £26,575 (2020/21)
  • 30 years after graduating any remaining debt is written off – you can forget it.

 

Personal Loans

With a personal loan, you borrow a specific sum of money for a specific period and commit to making monthly repayments to clear the debt by the end of the agreed period. Your repayment behaviour is recorded by the UK’s credit reference agencies. If you miss payments this is recorded and will adversely affect your credit rating for future credit.

It always pays to settle debt as quickly as possible so as to minimise the interest costs. So if your loan terms allow it, and you have the cash, you can make over-payments or pay off the loan early with one lump sum.

Should you pay off your Student Loan early?

You can see that the mechanics of personal loans and student loans are quite different. In the case of student loans, there are numerous uncertainties and unknowns and so it is impossible to calculate at the start of your university course precisely how much debt and interest you will become liable to pay, but also how much you will actually be required to pay over the next 30+ years.

Commentators suggest rethinking what a student loan is. It is not so much a loan (that generates interest charges and requires repayments) than a “graduate contribution” or “graduate tax” linked to income.

 

Unless you graduate into a very high paying job there is a relatively low chance of ever having to pay off your student loan in full.

In fact, the Institute for Fiscal Studies (IFS) estimates that under the current student loan system over 70% of students will never pay back their loan in full.

If you have other debts (e.g. credit cards, etc) then it would make sense to pay these off first using any spare cash you have before addressing your student loan. Even then the consensus seems to be don’t pay off your student loan using this cash!

The argument is that the interest terms on a student loan are still generous and if you have spare cash then it’s almost certainly the case that you can put it to better use elsewhere – either pay off expensive commercial debt or invest it.

 

The full argument seems to be – forget what you’ve borrowed; ignore the implied interest rate – the only real cost is going to be an additional tax of 9% for 30 years. To see a good argument for not repaying your student loan read this Financial Times article.

So, on balance don’t swap your student loan for a personal loan – probably!

 

Personal Loans Guide

If you’re uncertain which type of credit might suit you or you have a money problem then one of guides may help you. We summarise each type of loan and their pros and cons, and address issues regarding debt and credit ratings.

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Written/Reviewed by: Amanda Gillam

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