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I just graduated university and started my first job. I have £50,000 in student loan debt at 6.1% interest.

My monthly payment on this debt is £10 (direct from my paycheck). I can afford to pay £200 a month, but should I?

I've heard that student loan debt is not considered a derogatory factor when being evaluated by a mortgage lender. Is that true?

What if any problems will I encounter by continuing with the current payment situation?

dg99
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Callum Maguire
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    I am ignorant of student loans in the UK, but the monthly interest on this loan should be £254, so I can't see how paying £10 a paycheck (even weekly) is a good idea. Is the rest of the interest government subsidized? Do you even pay any principal with this plan? – D Stanley Oct 20 '17 at 14:24
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    That is what I want to know, it sounds stupid to pay so little on such a high debt – Callum Maguire Oct 20 '17 at 14:28
  • Surely your £10 per paycheck isn't covering the entire monthly payment (unless you get a paycheck every day- hehe). Are you sure the loan isn't split into multiple subloans and the £10 is just the payment for one of the subloans? Please confirm the principle amount of the loan that £10 payment is for. – TTT Oct 20 '17 at 15:38
  • It is just what comes out of my paycheck. I earn a little over the threshold to make student loan payments. so that is why the payment is so low – Callum Maguire Oct 20 '17 at 15:48
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    @TTT £10 sounds about right - the payment amount is based on what you earn rather than the size of the principal. Look at some of the answers for details. – MD-Tech Oct 20 '17 at 15:53
  • @MD-Tech - Interesting. Both the question and the answers assume it's common knowledge that it's possible (and common) to make less than the minimum payments on the loan. I would consider adding a statement to your answer pointing that out since it's not something that people from other countries would be familiar with. (Or maybe since it's tagged UK it's OK to assume readers already know about it.) Regardless, thx for the explanation. – TTT Oct 20 '17 at 16:13
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    @TTT It is not possible to make less than the minimum payment, rather the minimum payment is based on your earnings, not the size of the loan. – thelem Oct 20 '17 at 16:25
  • I have edited the question to make it clear that it refers to a Student Loan (which it must for the repayments to be so low). This is a special type of loan that is government subsidised. They are only ever provided by the Student Loans Company. – thelem Oct 20 '17 at 16:31
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    Do you have investment opportunities at 7% interest or more? Or do you have any debt that has a higher interest rate than the 6.1%? The answers to those questions make it a very, very easy decision on whether or not you should pay it off sooner or later. – corsiKa Oct 20 '17 at 16:55
  • @corsiKa I don't have an investment opportunity that is better than 7% but I don't think it is as simple as that. it would if it is normal debt – Callum Maguire Oct 20 '17 at 18:30
  • FYI: When you make extra payments, tell them.... Yes tell/write them! .. to apply it to the principle. That will lower the loan. Otherwise they may use it to reserve for the next payment and still rake in on the interest. – Daniel Oct 20 '17 at 20:32
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    @corsiKa Unfortunately you cannot apply such a simple analysis to a student loan, because these loans are "forgiven" after a certain amount of time (e.g. 25 years for recently-issued loans in England & Wales). Some people may never expect to earn enough, or live in the UK long enough, to pay back anywhere near the total loan amount. In such cases, paying more than necessary is a mistake. – JBentley Oct 20 '17 at 23:08
  • The interest rate is variable based on your income too. If you’re earning around £22,000 I think you’re paying 3.1% interest. – Tim Oct 21 '17 at 14:48
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    @JBentley That's ironic - in the US you can't escape your student loans even through declaring bankruptcy! – corsiKa Oct 21 '17 at 16:46
  • I don't know about the UK, but in The Netherlands student loan debt is considered derogatory for mortgage. If you tell them about it, which they're just about to make mandatory. Besides, you're in trouble if you can't pay off your mortgage and you've withheld that information.Mortgage is also the only reason to pay it off at the moment, since the interest rate for state student loans is 0% at the moment... – Mast Oct 22 '17 at 19:57
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    If the comment starts "I am ignorant of student loans in the UK" then ignore it. They are so unique that any generic advice is simply wrong. – Mark Perryman Oct 23 '17 at 08:33
  • If you want to know your exact credit score check giffgaff money, the only proper service I managed to find that is free and I'd trust ... – Иво Недев Oct 24 '17 at 07:32
  • @ИвоНедев Note that the Giffgaff credit report is just a rebranding of Callcredit, from whom you can get your free report directly. Also note that Callcredit is just one out of three main credit agencies in the UK, and different lenders report to different agencies, so you won't get a complete picture unless you check all three (Callcredit, Experian, Equifax). Finally note that any "score" is just a guide. Each lender uses their own scoring system. It's the content of the report that matters. – JBentley Oct 24 '17 at 07:36
  • @JBentley My but clinches just by thinking about Equifax... I thought they were only USA good to know it aint. – Иво Недев Oct 24 '17 at 08:01

6 Answers6

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In the UK, supposing that this student debt is the government backed type debt and not private debt, then it will never be reported on your credit report and will not affect your chances of getting credit.

The student loan system in the UK is massively misunderstood by the general population and this lack of understanding is used for political aims by the media and political parties. Realistically the loans work like a graduate tax that stops when you have paid a certain amount. The interest rate is very low and capped by a function of the CPI measure of inflation and it is considered by credit analysts (I used to be one) as "good debt" meaning that it has at worst a positive effect on credit rating (it is actually normative in most cases). Paying it off early has some benefits in that it gives you more disposable income after paying off but this extra disposable income comes at a time when you have more disposable income anyway as you are earning more.

In terms of getting a mortgage the small monthly deduction from net income will have much less of an effect than your credit rating which, as mentioned above, this debt does not feature in.

Source: I'm in a similar position (just a few years older) and it doesn't show on any of my credit reports and never has.

MD-Tech
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    Would it impact the bank's calculation of "ability to pay", ie when determining the size of a mortgage to approve you for? I would assume a bank would still want to decrease income by mandatory debt payments, but I suppose if minimums truly are £10, then this is irrelevant anyway. – Grade 'Eh' Bacon Oct 20 '17 at 14:19
  • Does that mean that it never has to be paid back? At OP's level of debt and interest, even at £200 per month he will never pay it off. – Ben Miller Oct 20 '17 at 14:20
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    @Grade'Eh'Bacon that £10 payment will count against the repayment schedule but by about £10 a month... – MD-Tech Oct 20 '17 at 14:21
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    @BenMiller if you never earn more than the minimum to start repaying you may never repay ANY of it! – MD-Tech Oct 20 '17 at 14:22
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    @BenMiller after the minimum the repayment amount per month is a function of your salary, I should have mentioned that as well; most people should end up paying the majority of it. Think of it as a progressive tax with a maximum total – MD-Tech Oct 20 '17 at 14:25
  • @MD-Tech so would be paying 200 pounds a month be pointless seeing I won't pay it all back? and it doesn't count and I might as well stick to the monthly payments – Callum Maguire Oct 20 '17 at 14:26
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    @CallumMaguire that depends quite a lot on your attitude to these payments. if you see them as a tax on education it probably isn't worth it, if you think that you are likely to pay the whole balance off then paying it earlier is better than later due to the interest. Check that you really won't pay it off by considering how much you expect to earn in 10-15 years time! – MD-Tech Oct 20 '17 at 14:27
  • ahh I see what you mean when I earn more I will be tax more because of the high-interest rate but if I pay more now I will get tax less – Callum Maguire Oct 20 '17 at 14:36
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    In fact you'll be taxed more when you can most afford it and won't pay as much when you can least afford it. – MD-Tech Oct 20 '17 at 14:38
  • As an example I earn... some money... currently and pay £270 per month on my student loan. I'm on "plan 1" which is to say the older plan (I graduated 7 years ago) but when you earn more your payments will go up from £10 (ish) to the grand old sum of £270 and probably more! – MD-Tech Oct 20 '17 at 14:48
  • Note that recent student loans have significantly higher interest rates than your "Plan 1" loan. – Peter Green Oct 20 '17 at 15:05
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    @PeterGreen I am aware of this which is why it was just an example but my point is independent of the interest rate. If you pay nothing towards a loan (by earning too little) what difference is 1% interest vs 100% interest? – MD-Tech Oct 20 '17 at 15:09
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    This logic behind this answer assumes the government of the day will never change the rules, which is not at all guaranteed - especially if they first discontinue the existing loan system and replace it with something else. The problem is of course that the government is a monopoly here - you can't move your loan anywhere else if they change the rules. – alephzero Oct 21 '17 at 06:04
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    @alephzero this is a contract so the government would have to retroactively change every contract which is difficult under UK law and would result in a lot of large court cases. Remember that the judiciary is both independent and many have or had student loans in their family. The biggest political risk currently is that the opposition get in and cancel all student debt. Ceteris paribus my answer stands – MD-Tech Oct 21 '17 at 06:43
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    @MD-Tech Agreed. It is very unlikely (for political reasons) that any detrimental changes would be made retrospective (and this is why we now have multiple rules depending on when your loan was granted). Just to be pedantic though, parliament could technically apply any retrospective changes they want and the courts would be powerless to intervene (if done correctly) due to parliamentary sovereignty. It's not really worth considering such scenarios though because they are so unlikely, especially given how political of an issue this is. – JBentley Oct 21 '17 at 07:17
  • "... will not affect your chances of getting credit." - Is this really true though? Honest question, I don't know the UK system. Here in NL, student debt is also government-backed, and is indeed not included in (our equivalent of) a credit report. However, when getting a mortgage, banks tend to ask "do you have debts?", and if you say Yes (for your unreported study debt), this will affect how much they'll lend you. But if you say No, that's a lie, and that could exclude you from mortgage insurance, and technically is probably fraud. Maybe similar concerns are at play in the UK, maybe not. – marcelm Oct 21 '17 at 10:01
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    @marcelm Banks are generally interested in three things when it comes to debt: (1) are you responsible with debt (student loan isn't an issue here vs. e.g. multiple maxed out credit cards), (2) will the debt affect the bank's ability to get back it's money if it repossesses your house (no for student loan), (3) does it affect your ability to afford your monthly payments (here only the repayments matter, not the loan amount - and £10 a month is nothing). – JBentley Oct 22 '17 at 09:43
  • @MD-Tech the current interest rate (at least on my debt) is 6.1%, which is quite a lot - would not it be better to try to pay it off early, if one can? – jermenkoo Oct 22 '17 at 11:19
  • @jermenkoo Not if it will eventually be written off or you have better use for the money. See my answer. – thelem Oct 23 '17 at 07:44
  • @jermenkoo the interest rate is calculated at a scale of 0-3% based on income plus inflation which is currently 3.1% so it may go down in future – DavidTheWin Oct 23 '17 at 11:40
  • @JBentley the government have already changed the terms once by not increasing the repayment threshold from £21k with inflation. – DavidTheWin Oct 23 '17 at 11:43
  • @DavidTheWin No, that's a misunderstanding. It's not in the terms that the threshold will ever increase. The lack of increase was merely a broken government promise from 2010. Governments break promises all the time but get away with it because they're not legally binding. Plans should be based on what the loan terms say, not what a government minister promises for the future. – JBentley Oct 24 '17 at 05:22
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    Indeed not many people understand the student loan ... Its designed in such a way that you shouldn't feel its hit at all and if you can't afford to pay it, you don't. Its brilliant! – Иво Недев Oct 24 '17 at 07:34
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For most people the answer is a strong No, you should not pay more than the minimum repayments.

UK student loans are a special type of debt with two big differences to a normal loan:

  • You are not required to make repayments while your earnings are low.
  • Many students will never repay their loan in full, instead the government will write off the remainder of their loans (typically 30 years after graduation).

Any overpayments you make will reduce your balance, but if the balance of the your loan is going to be written off anyway, then it doesn't matter to you what that balance is.

If you expect your career earnings to be high enough that you will repay the loan in full before it is written off then may be in your interest to make early repayments, but even then you will want to consider whether you have better uses for your money, e.g. paying off other debt or putting a deposit on a property.

Money Saving Expert has good resources for UK student loans: http://www.moneysavingexpert.com/students/student-loans-repay http://www.moneysavingexpert.com/students/student-loans-tuition-fees-changes

thelem
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    +1 for making the very important point that many people will end up having a large proportion of their loan written off eventually. This is particularly relevant for people who don't expect to have very high salaries over the course of their working life, or who don't plan on remaining in the UK. Paying extra in those situations is just a waste of money. – JBentley Oct 20 '17 at 23:12
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    You are still required to pay it if you leave the UK, though it's harder for them to enforce. – Peter Green Oct 21 '17 at 12:27
  • @JBentley your income has to be more 60k on average to pay it off in full. That’s pretty rare. – Tim Oct 21 '17 at 14:49
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    @PeterGreen Do you have a source for that? The site I linked to on your answer says that the time period for having them written off commences when when you are first eligible to pay. For some older loans, they are written off when you are 65. I didn't notice anything about needing to be in the UK for the clock to run. – JBentley Oct 21 '17 at 19:26
  • @Tim Agreed, but you have to be careful making generalizations because the time period for paying it off varies hugely depending on when and where you were issued the loan. – JBentley Oct 21 '17 at 19:26
  • That's it. I'm going back in time, getting UK citizenship and going to school there instead of the US. – 3Dave Oct 21 '17 at 20:02
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    @DavidLively I'd advise Norway. It's free there. – Tim Oct 21 '17 at 20:43
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    @JBentley https://www.slc.co.uk/students-and-customers/loan-repayment/completing-a-form-help-and-evidence/living-overseas.aspx – Tim Oct 21 '17 at 20:45
  • @DavidLively, if your time machine can take you back a bit further in the UK it would be free. When I went to university (early 90s) not only was tuition paid by the government, but you got given money to help pay for living expenses etc. It was called a “student grant” and it was means-tested on your parents’ income, but the thresholds were such that many / most people qualified. – Vicky Oct 23 '17 at 19:00
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The required payments depend on your income and if you manage to go a certain number of years (iirc it's about 30 though the exact rules keep changing) of making the required payments without paying the loan off then the loan will be forgiven. IIRC the loan will also be forgiven if you die.

As a result of this it is in general it is a bad idea to pay off UK student loans any faster than the government forces you to. If you end up unemployed or severely underemployed then you will only be required to make no or minimal payments on your student loan while a regular loan would be chasing you for payments.

A large deposit makes it easier to get a good mortgage deal. Furthermore the government has big incentive schemes for those saving up for their first mortgage deposit through the "help to buy ISA" or "lifetime ISA".

Overall I belive you will be far better served by saving up more money for the mortgage deposit than by paying off the student loan faster than required.

I would only consider paying off a UK student loan faster than required if all of the following are true.

  1. You have a stable long-term job or other stable long term source of income.
  2. You predict based on that job and it's expected career progression that you will be forced to actually pay off the loan before it is forgiven.
  3. You already have either bought a house or have saved up enough for a 25% deposit.
Peter Green
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  • I've never heard of there ever being a 30-year write off period. When the loan is written off depends on a number of factors such as when you acquired the loan. See here. +1 for some very good points though. – JBentley Oct 20 '17 at 23:13
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    Seems it's 30 years for "plan 2" loans http://www.studentloanrepayment.co.uk/portal/page?_pageid=93,6678775&_dad=portal&_schema=PORTAL which is what I believe the OP has. – Peter Green Oct 21 '17 at 00:58
  • Ah, well spotted. It's weird that they've got that on a separate page. Just a further note, this would apply only to loans taken after 1 September 2012 in England & Wales. If the OP's loan was in Scotland or Northern Ireland then the first table would apply. – JBentley Oct 21 '17 at 04:04
  • I'd personally add (4) - You can easily afford to pay more towards the loan, or already have enough savings to comfortably pay it off and still have some left 'for a rainy day'.

    Mentally, I prefer to have no debt. However, rich people know that having debt you can comfortably pay off is actually helping you because it frees your money to do something more profitable. In the asker's case, things "more profitable" than giving the government their money back might be "buy a massive TV or add an extension to my new house", or "buy a car so I can drive to see my S.O." or some such.

     – Ralph Bolton Oct 23 '17 at 13:13
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I heard this debt doesn't count towards a mortgage.

Maybe or maybe not, but it sure does count towards towards your bank account, and your bank account is where your mortgage payment comes from...

EDIT: what I mean is that you need to consider it when determining how much that you can afford.

RonJohn
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I've heard that student loan debt is not considered a derogatory factor when being evaluated by a mortgage lender. Is that true?

I'll focus on this part of the question since there are plenty of answers for the rest. I'm going to assume that by "student loan" you mean the official government-sanctioned one administered by The Student Loan Company and not just a personal loan from a bank aimed at students.

Student loans do not appear on your credit history. There are numerous sources claiming this, but I can also confirm it personally as I have a student loan and am in the habit of obtaining my credit report from all three main agencies (Equifax, Experian, Callcredit) on a regular basis: both the statutory reports and the online ones. In 16 years it's never appeared on any report.

However, that doesn't necessarily mean that it is irrelevant for a mortgage application. The majority of applications will ask you to provide a list of your assets/liabilities and your income/outgoings. If you fail to mention your student loan then it is entirely possible your lender will never find out, but it could be considered fraudulent (which if discovered, will negatively impact your application as well as future applications, as lenders also report to fraud agencies as well as credit agencies). One possible route to discovery would be if the lender asks to see your tax returns (not uncommon these days).

Primarily this information will be used to determine affordability. Not all lenders treat all outgoings the same, and the regulations are constantly changing. So it's best to discuss this with an experienced mortgage broker. From what I've read, affordability is the only issue and lenders won't consider it a "black mark" that you have a student loan. Note that at £10 per month, this is so small that you might as well consider it irrelevant from an affordability perspective.

JBentley
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  • It is also worth noting that the impact of £10 per month outgoing is much smaller than the benefit of having more savings by keeping the £190. (Ergo this is not a reason to overpay the loan.) – Mark Perryman Oct 23 '17 at 08:27
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    On the other hand size of deposit will affect mortgage affordability and price. Paying off £5000 of your loan will make no difference to repayments for many years. The same amount would make a huge difference to the deposit on a flat. – thelem Oct 23 '17 at 08:40
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In my own highly specific situation (UK, graduated in 2009) it made sense to repay early. I had saved up a large deposit towards buying a house, and built up an excellent credit score, but I still had about 1-2 years worth of repayments due at the point when I wanted to get a mortgage, and from speaking to various lenders and brokers it was clear that despite its relatively small size, this outstanding debt was deterring some of them from offering a particularly low interest rate. In this context, it made sense to sacrifice a small portion of my deposit.

user3490
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    If you are in the UK then either you were a student a long time ago and/or you have an exceptionally high paying job. Interesting, but exceptional and not relevant to the questioner. – Mark Perryman Oct 23 '17 at 08:30
  • "And then, when I sold my second quant startup, I did decide to pay it off ..." :) – Fattie Oct 23 '17 at 21:39