When it comes to growing your pennies, debt is a major hurdle for most people. Simply put, having personal debt costs you money that could otherwise allow you to grow your pennies.
However, debt is often unavoidable for most of us as it allows us to buy what we need today in exchange for a promise (and obligation) to pay it back tomorrow. After all, not many of us have enough to pay for a car, or a higher education, or a house, when we are beginning our adult lives.
It is important to remember though, that debt comes at a price –the interest we must pay for the privilege of using money that does not belong to us. The price of debt can make it very difficult to grow your pennies over the long term so Magical Penny’s Debt category explores various forms of debt, the false assumptions and beliefs, and the many pit-falls surrounding the use of credit.
Paying off Your Student Loans
In America, student loans are often huge due to the cost of tuition and it is the goal of many recent graduates to pay off their loans as their first financial priority. One of the first steps that can help with the process is researching refinance student loan consolidation. Doing so can bring all the loans together to make it more manageable and in some cases, with a cheaper interest rate, saving money over time.
Thankfully, being based in the UK I didn’t have lots of student loans with different providers – I only had 1 with the National Student Loan Company.
Student Loans in the UK
For many of us the first real debt we acquire is in the form of student loans. Compared with the US and other countries, student loans in the UK are a relatively new invention. Before 1998, the Education Act of 1962 made it a legal requirement for the local education authorities of the UK to pay for tuition and a maintenance grant. That’s right: university was free! (and remains so in Scotland).
As student numbers rose, the case was made in Parliament that this was not sustainable and tuition fees were introduced in 1998. They have been increasing ever since; from £1000 up to the current level of a maximum of £3225 a year.
Most of us going to university will have had dealings with the government’s non-departmental body, The Student Loans Company. It was formed in 1990 to help with additional ‘maintenance loans’ and only helped a few students at first but it has since become the only way that most of us can afford to go to university.
Bad debt? Good debt?
Whilst the accepted wisdom is that debt should be eliminated as quickly as possible, the student loans in the UK are possibly an exception to this mighty personal finance rule.
Debt is rightly vilified by most people because:
- It costs you money in the form of interest
- It adds ‘risk’ to your life. –if you cannot pay your debt payments for any reason you risk losing other possessions, adding further stress to your situation.
However, loans from the UK Student Loans Company are structured in such a way as to eliminate both these traditional negatives of debt: the interest rates on student loans are set so low that they have little ‘real’ cost compared with inflation. For loans made after 1998 there’s the added benefit that there is no risk of default (failing to pay back the loan), as you only need to pay back a set percentage of anything earned over a certain threshold. The details are different depending on when you took out the loan but the payments are almost always easily managable due to the thresholds used.
Payback of the loan is done automatically through your employer (or directly through the Student Loans Company if you’re oversees or self-employed). If you earn below the threshold you do not have to pay anything, and if you lose your job your payments stop too. Credit scores are unaffected.
For more recent students graduating around 2009 onwards if the debt if not fully paid off in 30 years it is forgiven. For earlier graduates like me (who started after 1998 but before 2006) , student loan debt is forgiven at 65 years old.
What a relief! No paying back student loans with your pension money!
The Bottom Line
This might all seem a little complex, but the bottom line is that UK Student Loan Company loans are still debt but they do not have the traditional down-sides of risk and cost. And of course there’s benefits to receiving a higher education too but that’s a whole other post.
Personal finance is all about priorities
Do you think it’s worth paying extra payments on a student loan debt given these favourable factors? Or is saving for a house and/or learning about investing in equities a better path to take? I would argue that the latter is way to go, but remember, finance is personal.
What’s your take on student loans?
You may also find useful: Attending University without Student Loan
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Spoken like a true student dude.
Pissed me off something rotten to see £120 slip out of my wage each month to pay for a course which was unfulfilling and ultimately a waste of time.
There is a bigger social issue here – the 50% target labour set to get young people into Uni. This has devalued the university experience for most and from an employers perspective diluted the quality of people leaving university.
Bringing it back to the SLC, the loan shouldn’t be so easy to get and should only be available for those with real aptitude for higher learning. Otherwise the ‘debt’ is for some just a painful reminder of a big waste of time.
Thank God mine is paid off.
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