Sunday, May 09, 2010

Student Loans

My dad forwarded me an email from MoneySavingExpert about student loans. They're suggesting that those of us with such loans may be facing a hike from 0% to 4.4% interest in the coming year and, therefore, that it might be beneficial for those with savings to make extra repayments.

I'm not a financial adviser, but this seems like scaremongering to me. Interest should be either 4.4% (based on price inflation back in March) or 1% above the Bank of England interest rate - which sets a cap at 1.5% (as they acknowledge).

It's true that it hasn't yet been confirmed what the interest will be, but I don't see why that should be taken as a sign that there will be a departure from previous arrangements. Given that a new election seems likely sooner rather than later, I doubt whatever parties form a government would want to risk a backlash from recent students by raising the interest on their debt.

Moreover, even if they are right that interest on student loans is set to rise, it's not obvious that repaying is the best option. Interest on any other loans, including mortgages, is likely to be higher, so those with other debts are better off paying those first, assuming no penalties for doing so. (That's something noted on MSE.) But also, once the student loan is repaid, we'll never be able to borrow again at such a favourable rate of interest. It may well be worth taking a loss over the coming year on the expectation of being able to profit in future.

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