InvestmentsAug 16 2018

Graduates told to prioritise saving over paying student debt

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Graduates told to prioritise saving over paying student debt

Most students and their parents should not rush to pay off student debt and instead should prioritise saving towards a first home or pension scheme, a national independent financial adviser has said.

Ahead of A-Level results released today (16 August), LEBC estimated 70 per cent of all student debt would eventually be written off, therefore saving to pay for university should not be a priority.

The firm said only those earning well above the £25,000 income threshold, which is when you are expected to start paying it back, over the next 30 years should consider clearing their debt.

For many others, it added, it might be a better choice to pay into a Lifetime Isa or employer’s pension scheme instead.

Kay Ingram, director of public policy at LEBC, said student loans were not like other debts, they were more akin to a graduate tax, which only applies in years when taxable income exceeds a threshold, and stops 30 years after graduation, regardless of how much has been paid back.

She pointed out every graduate who earns above the income threshold pays 9 per cent of their income in excess of this threshold towards their student debt, regardless of the amount borrowed.

She said: "Many graduates who follow a lower paid vocation or who experience gaps in employment due to redundancy, give up work to have a family or if they are self-employed, may struggle to make a large profit -  it is unlikely they will end up paying the loan back in full, and many may not need to pay anything at all."

Ms Ingram suggested parents should think twice before making the payment of university costs a priority because, for the majority of cases, borrowing the maximum and adopting a ‘wait and see’ approach would be the most sensible option.

Receiving an annual bill in the post showing how thousands of pounds of interest has built up can feel like a financial noose round your neck...Tom Selby

On the other hand, Ms Ingram said high flying career orientated graduates may benefit from paying back more than the 9 per cent required or they could find themselves repaying more than 200 per cent of the original loan because of the rolling interest. 

She said: "Each and every graduate needs to assess their personal circumstances and future career plans before deciding what is best for them."

Tom Selby, senior analyst at AJ Bell, said for many people deciding whether or not to use any spare cash to pay off student debt early was driven as much by emotion as logic.

He said: "Receiving an annual bill in the post showing how thousands of pounds of interest has built up can feel like a financial noose round your neck, and many will simply want to be rid of it as soon as possible.

"Anyone thinking of doing this should remember that in most cases servicing student debt is much cheaper than any other type of loan - certainly those who took out a loan before 2011 are getting a very good deal, with interest charged at Bank of England base rate or RPI inflation, whichever is lower."

Mr Selby said as a rough rule of thumb, for students who are not going to be high earners there was no point in paying off any part of the loan early because the debt was wiped out after 30 years so it would effectively be a waste of money.

He said: "Ignoring any arguments of the fairness or otherwise of using the RPI inflation measure, anyone with debts to pay off should focus on those with the highest interest first - so, if for example you have a bank loan where the interest rate is higher than on your student loan it makes sense to focus on that first."

rachel.addison@ft.com