Your starter for ten in the big . . . UNIVERSITY CHALLENGE

Should you try to pay off your loan early – before interest debt SOARS?

A LEAP in student loan costs across Britain as well as tuition fee rises south of the Border have sent university applications plummeting by 4 per cent this year. The Mail on Sunday asks whether worried borrowers already in hock should aim to pay off their loans early – before the interest burden transforms the debt into a six-figure sum.

MANY people would be glad of the chance to be 23 again. They might not do so anymore, because it is around this age when thousands of young graduates get a nasty surprise in the post. The unwelcome news comes in a letter that the Student Loans Company sends out after the end of the tax year following their graduation informing them how much they owe – and how much they have already been charged in interest.

For English and Welsh students – or Scots who chose to study south of the Border – those letters may well say that £50,000 is owed, including £6,000 of interest. Scottish students, exempt from tuition fees, fare better but will still face a steep increase in loan costs. Worst of all is the realisation that the sums can only go up – and rapidly.

Students starting a course in September could well be landed with a debt on graduation of £60,756 if attending a London university, according to lobby group Parents Against Student Debt. Interest starts accruing from day one – and after five years transforms into £72,214, after 10 years £83,053.

DIFFICULT SUMS

THE arithmetic involved is complex, depending on inflation and how much a former student earns in their working life. But Parents Against Student Debt’s sums suggest that if the Retail Prices Index increases at 2.8 per cent per year, someone who never earns the £21,000-a-year that triggers the start of repayment could owe £141,296 at the end of 30 years.

Defenders of the new loan scheme, introduced in 2012, say that debts are not important as they are cancelled after 30 years. So why worry? Liz Emerson, co-founder of think tank the Intergenerational Foundation, says few understand properly what they are getting into. She says: ‘There is no school education about the full implications of student debt and the trade-offs of going to university. Mis-sold may be a bit strong but they have certainly been misled.’

There are other criticisms of the scheme. The interest rate, at up to 3 per cent a year on top of RPI inflation, is seen as punitive compared, for instance, with the rate the Government pays on its own debt (1.9 per cent in total). It is also a major challenge to find out exactly what a loan costs, how much interest is being paid and the debt outstanding. Hannah Maundrell of consumer website money.co.uk says: ‘Regular lenders simply wouldn’t get away with this.’

Patrick Connolly of financial adviser Chase de Vere says many of his firm’s clients are worried for their children and grandchildren. He says: ‘The rates to be applied from September are particularly excessive considering the low interest rate environment. While the debts are wiped off after 30 years if not fully repaid by then, this is not much consolation for someone who faces a deduction from earnings for the bulk of their working life.’

THE KEY QUESTION

YOUR starter for 10. Does it make sense for graduates – or their parents – to make lump sum or regular overpayments?

Danny Cox of financial adviser Hargreaves Lansdown accepts it is a conundrum. He says: ‘Post 2012 student loan rates are horrendous and parents face a dilemma of whether trying to second guess their child’s career path and earnings potential to decide what is best value – repayment or let it ride until it is written off.’

Cox favours making extra payments for those who expect steady career progression. He says: ‘Assuming earnings rise at 3 per cent a year, someone starting on £30,000 would see a debt of £50,000 rise to £70,697 over 30 years. They will repay a total of £71,754 but still owe £85,885, which is written off. What is important here is that they have still repaid £21,754 more than they have borrowed. The interest is really important.’

High achievers whose income rises faster will have to repay even more colossal amounts of interest. Cox says: ‘Someone with a debt of £25,000, starting on an income of £25,000 but seeing that rise at 5 per cent a year every year would pay off the loan in 23 years at a total cost of £49,749 – nearly double the original loan.’

Connolly believes high achievers should certainly consider making extra payments sooner rather than later. He says: ‘This will reduce the debt before compounding takes hold.’ But for low earners he suggests this could be a ‘false economy’, with the money better directed for other spending. He says: ‘For someone saving for a mortgage or who has other debts charging higher interest it probably doesn’t make sense to make a partial repayment of a student loan.’

HOW TO MAKE OVERPAYMENTS

VOLUNTARY payments can be made by credit or debit card through the Student Loans Company at student loan repayment. co.uk; or send a cheque to: Finance Department, Student Loans Company Limited, 100 Bothwell Street, Glasgow G2 7JD. To make regular overpayments a borrower must set up a direct debit or standing order. You can also arrange regular payments by credit card or debit card

– but make sure with credit cards the balance is paid off monthly to avoid unwanted interest charges. To pay off the loan in full borrowers must phone 0300 100 0611. If they have been repaying through salary they need to provide payslips and a P60 to ensure the settlement figure is accurate.

CASE STUDY – LOAN PAID OFF

LAURA Rettie, pictured, is celebrating making the final payment on her student loan – but it hasn’t been easy.

The 34-year-old English and media graduate says: ‘I left university with £12,500 of debts, which isn’t much compared to the mind boggling amount new graduates accrue. But I didn’t expect to be still paying it off 16 years after starting my course.’ The process has been a hassle, she says. ‘For three years I didn’t receive a statement and was in the dark about how much I owed. But I eventually was able to log on to the loan company website and look back at payments.’ The situation was made complicated because Laura received a work bonus which meant she was able to contribute a bigger repayment than usual. Last month, Laura, who is employed in public relations, worked out she had seemingly paid off her student loan and contacted the Student Loans Company. Staff demanded copies of her last 12 payslips to prove how much she had repaid.

She says: ‘That’s just crazy. What other lender would get away with not actually knowing the balance of your loan and then expect you to prove how much you’ve paid back?’

She also had to provide her National Insurance number, a copy of her driving licence and other information – all by post.

She adds: ‘They made the process so hard and I’m still waiting to see if they take money from my wages automatically next month. They explained that repayments wouldn’t automatically be stopped and it’s all in the hands of the Revenue.’