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why i’m not paying off my student loans early

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Debt reduction is very popular in the personal finance blog world. Some of my favourite blogging friends are trying to reduce their debt (including being frugal, I’ve paid for this twice already…, single guy money, credit withdrawal, rocket finance, gather little by little, and others).

I have two major debts, the largest is my mortgage which weighs in at over £86,000 (about $172k). The other debt that I carry is my student loan, which originally totalled £12,000 (~$24,000) and is now down to around £9,000 (~$18,000). I’ve got no intention of paying off my student loan early at all.

I took out a loan for each of the four years of my degree course from the government backed Student Loans Company. There are three unusual factors about this loan which lead to me to decide not to pay it off early, they are as follows:

  1. repayments are income contingent - 9% of earnings above £15,000 (~$30k)
  2. if I haven’t paid it off by the time I’m 65, or if I become unfit to work, it will be written off
  3. interest is pegged to inflation

Why do these lead me to not pay it off earlier?

paying off slowly is risk free

The last two features combined mean that if something unforseen happens and I have a much lower income, or I am unable to work, or even if I get stuck in a minimum wage job, my student loan will not hamper my life further. If my income is lower, my repayments are lower, and I won’t be retiring with this loan still over me. It is safe for me to pay the minimum for as long as I like.

paying off slowly makes money

If I continue to pay it down at my current rate, it will take me another 10 years to pay off my whole student loan. At the moment I have about £200 of spare money a month that I could use to pay off my student loan early. If I used this money to pay down the loan more quickly, then I calculated that I could do it in about 2.5 years.

However, I could take that £200 and instead of using it to pay off my student loaninvest it in the stock market tax free via a stocks and shares ISA.

Assuming that there is always £200 plus my student loan payment available per month, either for debt reduction, or for investing in the stock market, that inflation is a relatively high 4.5%, and stock market returns are a reasonably conservative 7%, I would be £1,300 better off investing in the stock market. £1,300 is a lot of money.

disadvantages of paying it off slowly

The only disadvantage I can see is that I don’t get to experience the much vaunted debt-free feeling. I have it on good authority that it’s very satisfying. I don’t know, I’m in this for the long haul, and I think £1,300 will be very satisfying. And over the following 30 years to retirement, that £1,300 (assuming 7% returns) could grow into nearly £9,800. And that’s a very, very satisfying indeed.

what have i really done?

I really am investing £200 in the stock market (in pension and ISA, switching to an ISA only in April), and paying off my student loan as slowly as they’ll let me. Eyes on the prize.

Image by tompagenet.

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48 comments for “why i’m not paying off my student loans early”

  1. I agree - a Student Loan is pretty much the cheapest money you’ll ever borrow - even despite the interest rate rising sharply recently.

    I’m currently deferring my student loan (I think the rules allowing deferrement may have changed since I left Uni), although I may go over the income amount when you’re required to start paying it back soon, so I might have to start paying it off later in the year. I’d rather put the money to better use elsewhere though (credit cards, mortgage).

    Posted by Rob Lewis | January 18, 2008, 1:08 pm
  2. If my interest rate was tied to inflation I’d probably feel differently :)

    As it is, one sits at 9% and the other at 7%… yuck. :)

    Posted by paidtwice | January 18, 2008, 6:56 pm
  3. Good thing for people to think about - I just “negotiated” my wife’s schools down from a $100 payment per month to $39 a month because her interest rate is locked in at 3.00% . . . The difference in payments is being contributed toward our retirement.

    Posted by rocketc | January 18, 2008, 7:30 pm
  4. I completely agree with not paying student loans back early, that said I am aiming to pay mine off in full this year. I was happy with the little deductions while I lived in the UK but after moving out of the country, the hassles of paying small amounts to debt back in the UK are too great, I have set up a seperate high interest savings account with monthly contributions and when it is equal to my loan debt I will pay it off. If I still lived in the UK, I would follow your plan though.

    Posted by Looby | January 18, 2008, 8:42 pm
  5. Yeah, I agree. Of my debts, my student loans are likely the last ones that will get paid off. A few of them are at higher interest rates, but most are very good (3.75% range).

    Still, it was alot easier getting (and spending!) the student loan than it is now paying it back!

    Posted by DebtKid | January 18, 2008, 8:56 pm
  6. Thanks for explaining your reasoning on slowly paying back your student loans. You seem to have a solid plan and if it’s working for you, then you should do it.

    Posted by Laura | January 18, 2008, 9:31 pm
  7. I think you are doing the right thing. If you wanted to pay down debt then pay down the mortgage since it is “riskier” so to speak than the student loan - if you are unemployed, you will still have to pay the mortgage.

    My definition of debt-free includes my mortgage which coincidentally is almost exactly the same size as yours, so according to moi, we both have a long way to go before being debt-free.


    Posted by Four Pillars | January 19, 2008, 1:16 am
  8. I also agree. I have a student loan that amounts to $50/mo US (which is worth what, .25 cents in Euros these days?), and is at a whopping 5%. I earn that much in my savings account doing next to nothing.

    Posted by metroknow | January 19, 2008, 2:01 am
  9. Interesting approach. I think you’ve explained a lot of reasons why it makes sense for you. As for us, I think we’ll be doing a moderate snowball at times. But that’ll depend on interest rates, income, investments and the like. After all, it’s important to get started investing early because of the wonders of compounding. :)

    Posted by Mrs. Micah | January 19, 2008, 2:25 am
  10. I still have a student loan I haven’t bothered to pay off. It’s only about $5300 now so I could pay it all off quite easily, but the interest rate is locked in at 2.625%. That’s going to be lower than inflation just about all the time so it’s never struck me as particularly smart to pay it off. I took out the loans as an insurance policy and never had to use them to actually pay for college so I’ve been sitting on the full amount of the loans ever since. I’m still glad I took them out since I’ve been making money off that money (though not much) and it contributed a great deal to my sense of security after I graduated to have the student loan money in the bank.

    Posted by Andrew Stevens | January 19, 2008, 4:01 am
  11. The terms are so generous and you can do so much better by investing your money, you’d be crazy not to do what you’re doing. Even tho’ I’m a great fan of debt-freedom (in fact, just seconds ago posted a long squib on how to pay off debt), I think your strategy is very smart.

    Posted by vh | January 19, 2008, 6:24 am
  12. Good to see I’m not the only one with this idea. Makes me feel a lot more comfortable.

    If there was hassle involved - like if I was living abroad - I’d probably pay it off earlier too.

    Interestingly I can get a savings account at a higher rate than my mortgage interest rate, so I’m not overpaying that one either. But that’s a much tighter difference.

    Posted by plonkee | January 19, 2008, 12:57 pm
  13. I was just old enough to miss out on the student loans… had to make do with not a lot of money though

    Posted by Llama for brains | January 20, 2008, 2:12 am
  14. I’m not paying back my student loan, at all. My first degree was earned in Australia, and because of dual taxation agreements, my UK income isn’t counted for loan repayments (this may change in future, but I don’t believe it will change for me). Obviously I’m racking up inflation-linked interest, but I’m ignoring it in my debt/credit calculations. My ‘debt’ is only ~£3000, but I know of other people (mostly Swedes, whose student support is far more generous), for whom student loans become a significant factor in when, and when, they return to a home country.

    Posted by Pippin | January 20, 2008, 10:39 am
  15. Borrowing money for college is a big responsibility but college remains a smart investment for obtaining a satisfying career that earns a competitive salary.

    Posted by Loan Modification | January 22, 2009, 12:03 am
  16. I agree if your interest rate is fixed. It would actually work out to be less money or less purchasing power lost by paying it over time. But with it adjusting for inflation you have a problem. Is the inflation number in the UK a BS low number like here in the US?? If it is you are correct but if the government inflation number is anywhere near accurate then you need to pay it off early.

    Posted by Leo | February 10, 2009, 7:44 pm
  17. I envy those for who their money is left yet in order for them to invest it.
    The trouble that the stock exchange does not deal with the little investors.
    There is little profit there only according to me.

    Posted by Mortgage loan modification | July 18, 2009, 1:33 pm
  18. I agree the way you do it.

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  19. I wish that all of us could do such rewarding investments as college. They are the best deals we can have.

    Posted by Loan modification Consultant | November 14, 2009, 9:39 am
  20. If you could manage receiving a scholarship that would pay all your room and board expenses your life would be all set.

    Posted by Mortgage modification | November 17, 2009, 11:50 am
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  23. It’s really simple math. If you are paying a student loan at say 10% interest but you could invest that money at 11%, you invest the money. If you cant’ get more than the interest rate on the loan in investments… pay off the loan. Make money with your money, or get rid of the debt.

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  40. I took loans from an insurance company and never had to use them to pay for college so I’ve been sitting on the full amount of the loans ever since. it contributed a great deal to my sense of security after I graduated to have the student loan money in the bank.

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