Today a major new piece of analysis and a guide for university graduates launches, written by Martin Lewis, founder of MoneySavingExpert.com and former head of the Independent Taskforce on Student Finance Information.
It reveals that even though the headline student loan interest rate for recent English and Welsh graduates (post-2012 starters) is increasing to 6.1% in September – higher than many mortgages and personal loans – the majority of graduates should NOT try to clear the debt more quickly than needed.
Martin Lewis says: “Many graduates are starting to panic. First they look in shock at their student loan statements after noticing interest totalling £1,000s has been added. Then they read the headline interest rate for the 2017/18 academic year will increase from 4.6% to 6.1%. It’s no surprise I’ve been swamped with people asking if they should be trying to overpay the loans to reduce the interest. After number crunching though, the surprising answer for the majority is no.
“Most graduates won’t come close to repaying 6.1%. Not just for the obvious reason that the interest is only that high for those earning £41,000+. More potently it’s because what you owe (your borrowing plus interest) doesn’t change what you repay. That’s fixed at 9% of everything earnt above £21,000. All adding interest does is lengthen the time the loan takes to clear. As all but the highest-earning graduates won’t earn enough within the 30 years before the debt’s wiped to fully clear what they owe, most won’t come close to repaying all the interest added.
“More startlingly, for many graduates, even repaying say, £10,000 off a loan won’t actually reduce future repayments over the 30 years, so doing it would simply be throwing money away. In fact I’d love to tell most panicking graduates to simply rip up and ignore their student loan statements – I can’t quite though, as sometimes the letters request extra information, with penalties if you don’t respond.
“Yet for most university leavers, the term ‘student loan’ is a misnomer – it should be renamed the more accurate term: a ‘graduate contribution’ system. That doesn’t mean it’s cheap or fair, simply that people would make better financial decisions if they focus on the fact they’ll have to pay the equivalent of 9% extra tax above £21,000 for 30 years. Knowing that, they may instead use any spare cash towards defeating the biggest financial challenge for most graduates – building up a mortgage deposit.”
Full information and analysis is contained in the new mse.me/studentinterest guide.
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About Martin Lewis: Martin Lewis OBE, Money Saving Expert, is the journalist and consumer campaigner who created MoneySavingExpert.com and is now the site’s Executive Chair. Martin also founded and chairs the Money and Mental Health Policy Institute charity.
He’s the UK’s most-googled man, Citizens Advice’s Consumer Champion of the Year, and has spearheaded major financial justice campaigns including bank charges reclaiming (over seven million template letters downloaded), PPI reclaiming (over six million) and a successful large-scale campaign to get financial education in schools. He has his own prime-time ITV programme, The Martin Lewis Money Show, as well as a range of other regular media slots. He was appointed OBE in the Queen’s Birthday Honours in June 2014.
About MoneySavingExpert.com: MoneySavingExpert.com is dedicated to cutting consumers’ bills and fighting their corner. The free-to-use consumer finance help resource aims to show people how to save money on anything and everything, and campaigns for financial justice. It was set up in 2003 for just £100, and its free-to-use, ethical stance quickly made it the UK’s biggest independent money website, according to internet ranking site Alexa.com, and the number one ‘Business and Finance – Business Information’ site, according to Hitwise. It has more than 12 million people opted-in to receive the weekly MSE’s Money Tips email, and more than 16 million unique monthly site users who visit more than 28 million times a month. In September 2012, it joined the MoneySupermarket.com Group PLC.