Should I pay off my Plan 1 student loan

Should you pay off your student loan?
It’s a question I’m asked all the time often because people have looked at
their statements and are going: “Ah! The interest keeps adding
up, what should I do?” or because life’s going well, you’ve
got a little bit of spare cash and you want to know what to do with it. Now I’ve answered this
question many times before but normally I talk about
Plan 2 student loans. Those are the ones for current
students in England or Wales or anyone who started in
England and Wales since 2012. But lots of people are on Plan 1
loans and I get asked this too so this video is just about those loans. Now Plan 1 applies to anyone who
started university anywhere in the UK between 1998 and 2011 and Scottish and Northern Irish students
who started from 2012 onwards including those there currently. It’s important to understand most
of the messages in the media are about Plan 2 loans, but the
Plan 1 loan works quite differently which means the logic of whether
you should pay it off is different too. Now with the Plan 2 loans remember English and Welsh students
from 2012 onwards – the borrowing’s big and most people won’t repay what
they borrowed plus the interest in full before the 30 years
when it wipes, in which case it’s probably not a good idea
for most to try and overpay and I’ve got guides on the site
where you can go and read that. But let’s just examine
some of the differences between the Plan 1 loan and the Plan 2. First of all, with Plan 1
loans you borrow less because tuition fees tend to be lower
or non-existent than the Plan 2 loans. You also have a much lower interest rate,
so the debt won’t grow as quickly and you repay much more.
On Plan 1 loans your repayments are set as 9% of
everything you earn above £18,935 whereas with Plan 2, it’s 9%
of everything above £25,725 In other words, on
exactly the same income people on Plan 1 loans
pay much more each year. You put all those things together,
lower borrowing, less interest and you’re repaying more – and
it means you are far more likely to clear what you’ve borrowed
before the debt wipes. As for when the debt wipes, it’s complex. It depends in which country you went
to university and when you started. It could be 25 years after you
graduated, 30 years after you graduated or when you hit age 65. You
need to go and look that up. Now this concept of
whether you will clear Now this concept of
whether you will clear what you’ve borrowed plus
interest before the debt wipes is crucial for making the decision of
whether you should overpay or not. If you’re unlikely to clear it – which for Plan 1 loans is only going to be
those people on relatively low incomes then the interest that you see on
your statement isn’t real, because you would only pay all the interest
if you clear it before the debt wipes. Otherwise, you’re going to
pay less than all the interest and possibly less than you
borrowed in the first place. But, because most people
on Plan 1 loans will clear everything that you borrowed
plus the interest before it wipes that means your interest
on your statements is real. So we can do a direct
comparison between it and what you’d earn saving or what
you’d earn with other borrowings. So let’s investigate
that interest rate now. Now, the interest rate on Plan 1
loans is somewhat complicated because it’s based on
the lower of two figures so you have to look at two
to decide what it’s going to be. It’s either the rate of inflation – the
RPI rate which changes every September based on inflation the prior March or the Bank of England base rate plus 1% Now that’s currently 1.75%,
whereas from September 2019 this one is going to be 2.4%. So 1% plus the Bank of England is
the interest rate that you pay. This is crucial. As you can see the maximum interest you will
ever pay is the rate of inflation and that theoretically
means there is actually no real cost to your student loan. Now that might be really confusing,
so let me try and explain it to you. Now inflation is all about
the rate at which prices rise. Now inflation is all about
the rate at which prices rise. So something will cost you more in a
couple of years than it does right now but then people will tend to earn more in
a couple of years than they do right now and everything goes up
in a similar level. You know, 200 years ago someone who
earned £100 a year would be very rich they wouldn’t be rich now.
It’s all about relative costs. So to make this easy, let’s
imagine when you go to university your tuition fees and
maintenance loan total £10,000 enough to buy you a hundred £100
shopping trollies worth of goods. There you go. The next year, those shopping
trollies might all cost £101 the year after £102, and
then £105, and then £110. But because your rate of interest
is set, at most, at the rate of inflation all you’ll ever have
to repay back is, at most a hundred shopping trollies worth of
goods at whatever that costs in the future based on whatever earnings
are in the future and that’s the definition
of no real cost. Now you’ll remember I explained
that your interest rate is set at most, at the rate of inflation or it could be the Bank of England
base rate plus 1% as it is right now which is lower than inflation, and
that actually means, in technical terms your student loan is shrinking. So if we were to take this
purely on a theoretical analysis you definitely don’t want
to overpay your student loan because the debt’s shrinking,
not growing, in real terms. But that’s the theory,
so let’s move on to practice. In practical terms,
what you have to analyse is not the cost of your
student loan vs inflation but the cost of your student loan
vs alternative uses of cash. So if you can afford to overpay
it and you’re likely to clear the loan before it wipes, what else
could you do with the money? Now it’s important to
understand your student loan is cheapest long-term
loan you will ever get set at a maximum of the rate of inflation
and it has better terms too so that gives it a good head start.
The first question it asks you is: “In the future, will you ever need
other forms of commercial borrowing?” A mortgage, for example,
or a personal loan. Undoubtedly, they will be more
expensive than your student loan. You know, a standard
mortgage rate is 4-5%. OK, you’ll get a cheaper deal earlier on but it’ll be way more expensive
than the student loan is right now. Personal loans could be
10-15%, credit cards 20% and I won’t go into hideous forms of
lending that are more expensive than that. So what you wouldn’t want to do
now while you’ve got spare cash is overpay your student loan, but then
have to borrow it back from a mortgage or a credit card in
future when you need it. So if those are plausible events don’t overpay your student
loan, keep the cash liquid. But more so, even if you wouldn’t
be borrowing in the future the fact is the student loan interest
rate on Plan 1 loans is currently 1.75% You can earn 2% interest in a
one-year fixed savings account at the time I’m filming this anyway. So you can actually earn
more money in savings than your student loan is costing you. And that clearly means, both
because it gives you a safety net you know, put the cash in savings you’re both earning more
than the debt’s costing you, and in case you need to borrow back
in future, you’ve got a safety net I certainly would not be
paying off a Plan 1 loan Now you might say to me: “Hold
on. What about if in the future Now you might say to me: “Hold
on. What about if in the future inflation goes up and
savings rates don’t keep up so the interest is costing me
more than I can earn in savings and I don’t want to
borrow anywhere else?” Well in that case, all I’m suggesting
here is you lock your money away for a maximum of one year.
So at the end of that one year if the scenario has changed and you
want to clear the Plan 1 loan, you can. The only other caveat could
be if we forget this pure financial logic, which is what I’m basing
it on, and also look at you as a person. Do you trust yourself? Do you tend to
splurge and have bad impulse control? In that case, you might want to
consider – even though it doesn’t add up overpaying your student loan because at least then the money
is doing something good. But do remember, once you
make the decision to overpay you can never change your mind. So if in future you were to
lose your job and start earning less than that roughly £19,000
threshold where you start to repay so you have no student
loan repayments to make you wouldn’t then be able
to take this money back. So in general, don’t overpay
your student loan on a Plan 1. And if you’re in one of
those rare circumstances where you think it might be worth
doing, think very, very carefully because once you do it,
you can’t change your mind. I know that’s all been complicated. I’ve tried to take it quite slowly
and I hope it all makes sense. I expect some of you might want to
watch it through a couple of times and I will put a transcript of this in my
blog, so you can read it through slowly. But, if I go back to it, my big summary if you ask me: “Should I overpay
my Plan 1 student loan?” For most people, the answer is
no. Put it in top savings instead.

10 comments on “Should I pay off my Plan 1 student loan”

  1. Jivan Pal says:

    Great informative content as always — consider adding a drop shadow to your text, though, since sometimes it is difficult to read against the set background.

  2. Moo Moo says:

    What if I leave the country 😛

  3. Half Man Half Cat says:

    thanks martin. you one of the good guys!

  4. Sarah Peter says:

    Amazing video very clear thank goodness plan 1 is talked about finally!!Please do more like this Martin! You make sense of the scary money world and have learnt more from your tv show and website than in all my years of education put together!!

  5. Ajay Joseph says:

    Run for prime minster please

  6. Kaz baz says:

    I would of said no unless you have money to spare. It's written off after 30 years.

  7. C M says:

    Very helpful as always, thanks.

  8. AddictionSequence says:

    Unlimited asians bruh

  9. C4sp3r says:

    My advice would be read the book 'A Simple Path to wealth' by J L Collins. Based on near on 5,000 ratings on Good Reads it is scored 4.48 out of 5 and on Amazon US it is 4.8 out of 5 based on 856 reviews! Borrow it from your library if you can get it, currently it is available to Amazon Prime members as part of the kindle lending library for free as well or buy it for about £10. You will learn so much from it about money and how to set yourself up for life. The reviews on Amazon UK and USA are worth reading to see how good it is. Sticking to savings accounts for money you don't need for the long term (Minimum of 5 years) is a poor money decision, Martin hasn't left his wealth from selling MSE in savings fixed savings accounts, if you read his charity blog posts you see that he invested the money and that is what people should look to do, but only if they don't need the money for the long term! Also they should avoid high costs and stick to something like a Vanguard Life Strategy fund. But main advice is read that book!

  10. Chris Harrison says:

    Sad state of affairs when Martin feels the need to explain the concept of inflation to university graduates.

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