Like many of my fellow millennials (born between 1981-1996), I was encouraged to go to university, an opportunity which I snapped up and am still very grateful for. Now in my early thirties and having started a family, I wonder with all the other outgoings, when will my student debt be paid off? And should I opt to pay this debt off early or should I invest my money instead?
For the purpose of this article, I will narrow my scope to undergraduate student debt from plan 1 (which is relevant if you started your course before 2012) to plan 5, which is if you started your course after 1st of August 2023. All the figures used are from the GOV.UK site.
The usual rationale in paying debt or investing is weighed up between interest rates compared with investment return. i.e. if your investment return is above your loan interest rate, it’s best to invest.
The current student debt interest rates on GOV.UK range from 6.25% to 7.3% currently, although these do change with the retail price index (RPI) and for Plan 1 loans this has been as low as 0.00% from 1st September 2009 to 31st August 2010, then 1.50% until August 2015. This would mean your chosen investment would need to achieve this or more, in order for you to be better off.
When we consider the short term, this could be tough in times of high interest rates but over the long term, it is a realistic prospect for investments to outpace interest rates.
The graph below shows a typical balanced investment portfolio with 60% in equities (company shares) and 40% in fixed interest (bonds). This graph shows the investment from October 2014 to November 2023. As you can see there have been many ups and downs but over this time scale, this investment has grown 70.99% in that period.
The trick with student debt is that it is very different to any other debt. Yes, rates change over the years but with student debt, you don’t start paying it off until your income meets a certain threshold, which ranges from £22,015 to £27,660. Once you earn over this threshold you then pay 9% of your income over the threshold. However, this is before any other tax is taken – it is based on your gross income.
Importantly, this is only based on earned income, and not income received, for example, from income protection payments.
Your student debt is written off after a period, and depending on your plan type, this can be 25 to 40 years after you were first due to repay or at age 65. The two key points here are firstly the terms “when you are first due to repay” as this means that the clock starts immediately.
However, like myself, many students either go traveling, or don’t earn up to the threshold and therefore don’t start paying it off right away, reducing how much you pay. Also in some instances, the debt is written off when you reach age 65, meaning that if you are a mature student and finished your degree later in life, you may have to pay off very little.
I would encourage you to visit the GOV.UK site which will show you all the research above in more granular detail (https://www.gov.uk/repaying-your-student-loan)
The facts and figures above all indicate that it probably makes financial sense to invest your money over the long term instead of repaying your student loan. However, we are only human and we can’t be rational with every decision. You might be an individual who squirms when you think of debt and want it out of your life. If that sounds like you, it might be best to pay your student debt off early.
I have always just accepted that a small portion of my income goes out each month to repay my loans and although I’d rather be able to spend that money now, I am more excited by the idea of investing some of my other money to hopefully grow and enjoy in future with my family.