For most of us, the concept of debt is as a sum that is borrowed and then repaid as soon as possible. However, while that might be the case for regular finance, student loans are rather different. As a result of the very specific terms and conditions that come with student loans, for some people, it may actually make more financial sense not to repay student loans. So, how does it work?
This is the first essential question. Depending on when you went to university you will have a different type of loan and alternative rates of interest and repayment might apply.
First of all it’s worth noting that most student loan repayments will be automatically deducted from your salary once you go over the specific threshold for your type of loan. So, you will not have any choice about making the basic repayments. What many students are currently struggling with is the question of whether they should overpay on a loan – or pay it off completely if they have the cash. The short answer to that is, unless you are earning more than £50,000 a year, you’re otherwise debt free and you’re not likely to want to get on the housing ladder any time soon there may not be any financial benefit to you in committing to total repayment. Here’s why:
Rather than trying to clear such low interest debt that is going to disappear at some point anyway it makes sense for many people to invest extra cash elsewhere. For example, you might have credit cards or other debts from your student days that are smaller but have higher interest rates. So clearing other debt should be more of a priority than overpaying on student loans. Putting money aside into savings can also be more constructive than sending it to your student loans lender. If you’re lucky you might find a savings interest rate that is higher than what you’re paying for student loans. But you can also create some security by putting that additional money aside for a rainy day.
For many people, working to overpay or fully repay student loans as soon as possible just to be debt free just isn’t financially smart. Rather than worrying about having that debt hanging over you it may well make sense to use the extra money in a different way to help secure your financial future.