Experts have said paying off student loans early doesn’t save graduates money in the long run as interest rates continue to rise.
Due to the cost of living crisis and soaring inflation, many graduates are considering paying off their student loans sooner in order to cut costs in the future, however, experts say that may not be helpful.
Experts look to the maths
According to Money Saving Expert Martin Lewis has said the decision to pay off your student loan early ‘depends on whether you’ve other debts and when you studied, as that dictates your interest rate’ – however, it’s rare that the answer to the question is yes.
The expert basically said: ‘Based on the maths, only those with pre-1998 loans who definitely won’t need to borrow should be racing to repay their student loans.’
This is due to the fact of the conditions surrounding student loans – most are set so a person doesn’t have to pay it back until they’re earning over a certain amount and if a person loses their job, unlike other loans, the paying back isn’t demanded as Lewis said ‘unlike any other lenders, the student loan company won’t come knocking on your door’.
Bye-bye loans in 30 years
Then there’s the fact student debt is wiped after 30 years – yes that seems like a long time but, for many, if you get to age 51 and have paid it off full it’ll simply go away.
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Lewis said people rushing to pay it off early also have a chance to ‘overpay’, he explained: ‘It means there is a chance that after you overpay, you may then stop earning over the threshold, die or be incapacitated, so will have unnecessarily repaid debt that you didn’t need to.’
Is it worth it?
So is it worth it to pay it back early? Well, unless you’re of the starting class of 98′ or less it doesn’t seem the most advisable option. According to Which? Magazine of course making larger voluntary repayments will clear you of student debt earlier but it doesn’t lower your monthly repayments.
The publication said: ‘You’ll clear your debts earlier, but if you’re one of the majority who can expect to make repayments for 30 years, this won’t save you any money in the long run.’
It also made the argument that ‘optional repayments will only really make sense if they let you clear your loan in full, or put you within touching distance of doing so’, because ‘unlike other types of loans, an overpayment won’t reduce the amount you repay each month’.