You have completed your degree course, now is the time to pay back your student loan. However, you will begin to clear your dues once you start earning more than the threshold income. Many students are supposed to pay a fixed percentage. Depending on the policy of a lender, of the debt as a student loan instalment.
If you are a student of Northern Ireland and pursuing a degree programme in the UK University, Student Loans Company will impose UK lending rules on you. You will pay 9% of the amount over the threshold income that is £2083 a month or around £25000 per annum. You are not allowed to pay your debt unless you do not earn over the threshold income.
The situation grows complicated when you are handling other debts along with your student loan. Unlike student loans, short-term investments do not provide you with flexible payments. They do not bear any clause of threshold income. You are supposed to pay the debt in lump sum regardless of your financial condition.
This blog will help you understand how to tackle both types of debts.
How Much Should You Repay?
The repayment of a student loan depends on how much you earn, not how much you owe. The rule of thumb says you will pay 9% of your income over the threshold income. If you stop working due to any reasons or you are getting poorly paid (below the threshold income). You will not repay your loan until you begin to earn more than the threshold income. You must remember that you will repay the loan even if you have left your course in the middle.
If you are an employee and you are earning more than the threshold. The amount will be deducted from your payroll the same way as a tax. If you find repayments are not inferring. Inform your employer otherwise it will invite a penalty. Make sure that you have evidence of notifying your employer of the student loan.
If you are self-employed, you will notify HMRC of payments when you fill out self-assessment form. Make sure that you have added in other income sources such as savings interest, pension, dividends, and the like.
Pay Off Other Debts First
When you have student loans and other short-term mortgages, always try to settle other high-interest debts first. Any default will cost you late payment fees and additional interest payments. The more you delay to clear your mortgage. The higher the interest you will pay. Further, it will take a toll on your credit rating.
Debts other than student loans are to be pay on the scheduled date. No matter you have enough money to pay them back. Student loans do not affect your credit rating because they do not show up on your credit score.
If you stop repayment, you may notice interest accruing on your outstanding amount, but you do not need to worry because this is the impact of inflation.
Unlike other debts, you do not need to repay the student loan unless you have money. You can stop repaying the loan even if you have already started it, and then suddenly your income drops down for any reason like job loss. This will not pull your credit score, and you will not pay the penalty.
If you have other high-interest debts along with student loans, you must try to give priority to other loans over the student loan. If you continue to make defaults, your credit score will go down, and your lender may issue a CCJ against you.
Is it better to repay than save?
You may want to clear your dues at once instead of saving money if you can afford to repay the debt. But you should avoid it for two reasons: the loan may cost you more, and you may end up with borrowing again at higher interest rates.
If you save your money, the interest you earn on savings may outstrip the money you save by repaying your loan. For instance, you have a student loan of €10,000 at 2% interest rate, and you have saved up to €5000 on which you can earn the interest of 3%.
The repayment on your loan will save you €100, but you will earn €1500 with your savings that is better off. As long as you are receiving more from your savings than the cost of your loan, you should not repay your student loan.
You might not need a debt presently. But in future, you may come across an unexpected expenditure. If you have used your saving toward your student loan, you will end up with taking out a short-term loan at high-interested rates, and you will be supposed to pay back the debt in full regardless of your income.
To summarise, as a responsible borrower. You should manage your finances carefully and judiciously to live a debt free life. First, you should pay off other debts and then student loan. You have owed money; it is your responsibility to pay back the money.