[Important note: This was originally drafted waaaay back in December 2017]
Pay-to-Play in Higher Education
In the UK, if you earn more than £17,775 per year, then you pay 9% of your earnings above this threshold towards any Student Loan debt still outstanding.
On the one hand, it seems like a great idea. If you’re not earning, you don’t pay – and the more you earn, the more you pay. While living in the UK, said payment gets taken automatically from your paycheck, so you never even see it.
Kind of like an education tax, in all but name.
Five Years of Wheel-Spinning
At the start of 2017, my student loan total was an eye-watering £18,000 (or about $24,725 for you folks across the pond). The painful thing is that I’d been chipping away at the loan since mid-2012, but barely making a dent in the interest, let alone paying down the initial amount (also called principal).
After a lot of asking around, the overwhelming response was: “Don’t bother paying more than the minimum! It gets struck off after 25 years anyway.”
Assuming I stay at my current rate of paying back £56 per month (which hopefully won’t be the case forever, and I’ll someday be in a position to pay more each month), I’ll be paying back somewhere in the region of £13.5k. Or, to be more precise:
(56 x 12) x (25 – 5) = £13,440
…which seems like a bargain, until one realises that I’ve already been paying back for five years. And, of course, the loan has interest, which means it isn’t just a case of repaying £18,000. Nope – the monster is just going to keep growing.
The price of debt
The ‘cost’ of my student loan isn’t just the number on the annual statement. As with anything in life, it fluctuates.
- Payments – Paying down the principal means less interest gets added per month.
- Interest – Causes the total amount to increase if not paid. (E.g. when between jobs, or paying back a lower monthly amount).
- Inflation – The ‘real’ cost of the loan in terms of how much your money would otherwise buy.
- Opportunity Cost – What could you be doing with the money if not paying down debt? (For example, investing it or using it as a down payment for assets such as a house).
In theory, it shouldn’t be a struggle to pay the minimum monthly amount, and put anything else into an investment vehicle that pays out more than the interest percentage on the loan. After all, I’d had money in a savings account before the interest rate dipped to below the rate on the loan!
While emotional responses are the enemy in almost every financial situation, it’s important to acknowledge them, rather than pretend they don’t exist.
In this case, I’ll admit that I spend so much time thinking about the loan and considering all the options in terms of repayment (minimal or full), that it creates a real sense of frustration over and above the loan itself!
Essentially, it’s financial clutter.
It’s almost funny to write that – as though this amount that I’m currently battling just needs to be plucked off the shelf and thrown away. But it is clutter, both in terms of my mental state but also in reality. It’s something else to deal with when the paperwork comes through once a year, or ensuring the SLC knows I’m no longer a UK resident, or just updating that column on my financial spreadsheets every time I pay back (either from my salary or any extra chunks).
One of the big driving factors for loathing to owe anyone money is the idea that, until the debt is wiped out, the cloud of uncertainty hangs over your head. (Thanks also to Brexit for this, since I’m not living in the UK). This makes it impossible to have the kind of financial freedom that most adults my age (mid-millenial) crave. i.e, not true financial freedom at all, but rather the best that our financial confidence tells us might be possible. Maybe. At some point. That is, lack of debt.
Student Loan Repayment: Fast or Slow?
So I will continue to pay down my Student Loan (specific method TBC), although at the same time dealing with my desire to see the final ‘£0.00’ in the outstanding debt column, by calling on my more logical brain to keep investing, since that generates at a greater interest rate than the loan demands.
It’s going to be a fine balancing act, but I know that it’s the best way forward in the long-run. It means I’ll hit the ground running once my debt is paid. I can then funnel that money into investments to protect against the likely £0.00 I’ll also see once it’s time to draw a pension. (But that’s a different post!)
This is, I believe, the true way to financial freedom.
Being self-aware enough to be self-indulgent, without crippling yourself in the long-term by being too myopic with short-term goals.
The Final Outcome
So, my decision to fully pay off my Student Loans hasn’t changed. Neither has the goal of doing so before I hit my 31st birthday (approximately 27 months, as of December 2017). This isn’t what I’d necessarily suggest anyone else from the UK to do, mind you. But like I said, I’m self-aware enough to know that at the moment, this is the right path for me. Who knows, maybe I’ll change my mind in the future.
This is the kind of financial mindset conundrum that made me want to start this blog in the first place – so hopefully in the future I’ll look back on this post and consider the whole experience a learning curve!
Now, when did I last update my spreadsheet…?
What about your Student Loans? Are you going for the minimum contributions or has the uncertainty of it hanging over your head got you worried enough to pay it off in chunks? If you’re American, what’s your plan of action when it comes to busting through your debt amount?