Save or pay off?

[Sput]

Hello all, thought I'd ask about for some worldly financial advice. I, unsurprisingly, have a student loan from my degree and I'm not currently earning in a way that means I have to pay any of it off, HOWEVER its interest rate is the RPI (inflation rate) so over the last 18 months it's grown faster than I'd have liked. Of course, it's lent on very nice terms that mean I'll never get a visit from men with sledgehammers or have it affect my credit rating. Thing is, i DO have enough money that I can afford to at least pay off the interest it accrues each month, plus a little bit more. I quite like that idea as it means when I finally do get a proper job it'll be a bit less eye-wateringly huge.

On the other hand, I have an ISA, but that's gotten shit lately because of the interest rate cuts, so there seems like less benefit in saving at the moment: throwing a grand into the ISA gives me £3 more interest a month (it might be even less after the rate cut the other day) whereas throwing a grand at a loan repayment reduces the monthly interest payments by slightly more.

So, which do people think I should prioritise? Obviously I'm not going to throw my life savings into loan repayments or anything daft like that.

[Mr Q]

We have a similar scheme here for our student loans - there's no interest rate as such, simply that the amount we have to repay is indexed to the inflation rate (which I guess is the same as saying interest rate = inflation rate). You pay off the loan as you earn enough money according to the government's calculations. Now, generally speaking, we tend to observe wages increasing in line with inflation or hopefully at a slightly faster rate than inflation due to productivity gains. That is, real wages will increase over time for the average worker. So if you believe that, looking forward, your wages will tend to grow at a faster rate than the inflation rate, you are better off waiting. The reason for this is simply that the cost to you of paying off your loan (in terms of a proportion of your income) will actually be lower. Now, there is an important exception to this: if the government offers you a discount for upfront, voluntary repayments, this might change the calculations. I don't know what the UK government does in this area, but I do know it's something the Australian government offers with our HECS scheme.

And of course, all the appropriate legal caveats apply here: I am not a financial advisor, and the comments offered here are of a purely general nature. You might find some merit in consulting a qualified specialist in this area to address the specifics of your situation. Blah, blah, blah.

[Nick Harvey]

And of course, all the appropriate legal caveats apply here: I am not a financial advisor, and the comments offered here are of a purely general nature. You might find some merit in consulting a qualified specialist in this area to address the specifics of your situation. Blah, blah, blah.

At least you haven't got a megaphone.

[Sput]

Actually this WAS all sparked off by a man outside my flat with a megaphone saying "Your loan is in danger, clear your loan now"

[Mr Q]

Yes, I believe the megaphone comes with the relevant financial qualification.

[rts]

I always clear debts with savings. I am member of Experian (I strongly recommend this) where you can see your Credit Report as organisations do when you apply for credit.

Student Loans do not show on your credit report, but I got my latest annual statement through for my Student Loan. It accrues over £30 interest per month.

Even if it's just a small amount, whack off what you can afford per month. The interest growing on the loan will be more than any interest you may earn by keeping your money in savings.

Two other tips regarding your Credit Score.

1. Never miss a payment! Missing one payment can really hurt your score and will take months to restore.

2. Get quotes, avoid searches. Every time your report is searched, this leaves a footprint on your credit report which will hurt your score. Many people get into a downward spiral. Apply for credit, get rejected, apply somewhere else, rejected. Do this five times and you would have completely fucked your score.

Obviously there will be times when you need your report to be searched, but space out searches, avoid them if possible, and if you are rejected, find out why. Don't just re-apply for credit elsewhere.

So Sput, my main advise, clear all debts before saving. With interest rates so low at the moment, that's a further reason why I would suggest this course of action.

[Nick Harvey]

I think the key to all this is that, whether base rate is 1% or 16%, the interest rate on borrowings is normally higher than the interest rate on savings.

You'll occasionally get a good savings rate that might be a bit higher than a particular borrowing rate, but it doesn't happen all that often.

Whenever you're paying higher interest on a loan than the interest you're getting on savings, then yes, use the savings to pay off the loan. In a word, it's quite simply cheaper to do that.

This advice is brought to you with all the previously mentioned disclaimers and without a megaphone.

[Mr Q]

Even if it's just a small amount, whack off what you can afford per month. The interest growing on the loan will be more than any interest you may earn by keeping your money in savings.

Not necessarily. Firstly, under normal economic conditions one would generally expect the interest rate (on high interest bearing savings accounts at least) to be higher than the inflation rate. Secondly, it also depends on the relative size of your savings versus your debt. Even given the current economic settings, it is conceivable that somebody could earn more in interest off their savings than they would be liable to pay in interest off their student loan debt.

In saying all of this, of course there is little incentive to save at the moment with interest rates being so low. For that reason, if you're looking for something to do with your money, paying off debt on student loans is certainly an option. I'm just not convinced it's the best option necessarily. Again, if there are discounts for sizeable voluntary repayments, this might indeed make such a move worthwhile. But I don't know what British government policy is in this area.

All the usual caveats apply to the commentary above.

[Sput]

No bonus as far as I know, and the debt is rather larger than the savings