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Paying student loans upfront can cost thousands

paying student loans

We came across an interesting article about paying student loans last week that we wanted to share with you.  It sounds odd but paying your student loan upfront could end up costing you (or mum and dad) more!  Read on to find out why….

The extract below is taken from stv.tv ‘Money Saving Expert Martin Lewis: top five counterlogical cost cutting tips’

Paying student loans upfront can cost thousands

With the deadline for new students in England to apply for finance by the start of term less than two weeks away, this is an important point to consider. Students in Scotland have until June 30 but, unfortunately, the deadline has passed for Wales and Northern Ireland.

With the cost of studying in England increasing, students starting university since 2012 can leave with loans of nearly £50,000 after three years. In addition, they pay above-inflation rates of interest, up to Retail Prices Index plus 3pc.

To beat the cost some parents are extending their mortgages or using their savings to help their children avoid this debt but this can be a costly mistake.

What matters is the amount to be repaid and not what is borrowed. Current repayments are 9pc of everything earned above £21,000 a year (likely to rise with earnings from 2017). Repayments continue for 30 years, unless the whole loan plus interest is cleared. Many won’t repay in full before the 30 years is up.

An example for parents. If the £27,000 tuition fees are paid upfront, and their scholar becomes a poet and never earns above £21,000, the money is wasted. Even many earning over the threshold won’t repay what they borrowed in real terms, so paying upfront would result in a loss.

If you are going to save up for your kids, then it’s likely the money would be better used to provide a deposit for a house, or prevent other more damaging forms of debt.