When we have a loan, we are often advised to repay it early. This is because the longer we normally have a loan for; the more expensive it becomes. However, a student loan is very different to other loans and therefore there are many things we do not apply to it. This includes paying it back early as it could end up costing you more money if you do so.
Cost of the student loan
The cost of your student loan will vary depending on your salary and if you repay it early it could end up dearer. This may sound very odd, but it is to do with the way student loan repayments are calculated. You only have to start repaying a loan once you reach a certain salary threshold. Then the amount that you repay each month will move up a scale until you salary reaches a certain ceiling level. This means that if you earn more money, you will pay back more, but if you earn less you will repay less or you may repay nothing at all. So if you have a low paid job, have no job or just work part time, then it is likely that you will make no repayments at all. Even once you start earning enough to make repayments, you may not be repaying the maximum amount.
This means that if you have a low salary for all or part of your repayment period or you are out of work, perhaps due to illness, pregnancy, looking after family or not being able to find a job, you will not have to make any repayments on your loan. Some people will never make a repayment and others may only make some repayments or repay at a low rate. This means that there are some people that will never repay the full amount of their loan. In fact there are statistics to show that around three quarters of all graduates do repay their loan in full.
Term of the student loan
The student loan only lasts for thirty years. After this time any remaining money owed, including the interest is written off and the cost is covered by the government. This means that potentially the full loan never has to be paid off in full. It all depends on how long you are working for from the time that you leave university and how much you are paid for that work that you are doing. Many people will not work continuously for the thirty years as they may have time off between jobs, to have a family or because they are unwell. This means that they will not be paying back the loan all of the time as when they are not working they will not have to be making any repayments. Obviously it is hard to predict whether you might be taking time off work, but you may have plans to work and then travel and have a family and then take time off or only work part time. If you do have plans like this, then it is likely that you will not have time to pay off the loan in full.
Therefore the reason that it is not wise to repay your student loan too early is because you could find that it will mean that you pay back more than necessary. As only a quarter of graduates repay their whole loan and the interest, it means that the odds are that you will not pay back all of yours. If you therefore decide to pay it back early in full, you will pay back the full amount that you owe. This means that you could end up paying back a lot more than you would if you waited and paid in instalments as if you miss any repayments, you will repay less.
It is not always easy to know whether this will apply to you. However, if you have started off without a job or with a low paid job, then you may find that even if you repay in full from now on, you will not repay it all. If you are planning a family and therefore take leave to look after children or feel you may decide to work part-time, then this will mean that you will not be making so many repayments.
It is really only graduates that have a high enough paid job to make a full repayment each month right from when they graduate and that will continue to work for the full thirty years, that will repay the loan. It is therefore worth thinking about your employment prospects and how much you are likely to earn. Then consider whether you might take any breaks from work and how long they may be for.
It is also worth thinking about how much money you might make if you invest that money you were going to use to overpay the loan rather than using it to pay the loan off. Obviously investments are a risk but you may be prepared to take a small risk or even a higher risk if you can potentially get a good return on your money. A financial advisor will be able to help you with this.
It is also worth considering that the rules on student loans may change in the future. There have been promises that there will be no loans in the future and those that have had them will have the money written off and any repayments sent back to them. This means that even if you repay it you may not be at any advantage.
There are of course some graduates that feel a moral obligation to repay their loan in full. They feel that they have had a good education which will be worth a lot to them. Therefore they feel that they are perfectly happy to repay the loan and therefore want to repay in full. In this case, it would make financial sense to repay it early so there is less interest accumulating on it and therefore it will be cheaper to repay.