Should I Repay my Student Loan Early to Avoid Rate Hikes?

If you have a student loan then you may have concerns about the fact that interest rates are likely to rise in the future and cause the loan to be more expensive. You may think that if you repay it early this will help to save you money. However, although this could be the case, it is important to understand more about rates as well as student loans before you make your decision.

Interest rates

Interest rates have been at record low levels lately and so it has left most people assuming that the only way that they can go is up. There have been a few very gradual rises and it seems likely that there might be more. This could make many people worry that the rates may continue to go up.

While this could be the case, interest rates are very difficult to predict. It is also worth remembering why rates are changes. The Bank of England change the base rate when they want to change the pattern of spending. They look at inflation, which is the increase in prices and if it goes up too high they use an increase in interest rates to reduce it as people will have less money to spend and prices go down. This means that if interest rates go up and you pay more for your loans, then prices do not rise so quickly so you are not going to be paying out more in interest on your loans. Therefore, you should find that you should still be able to manage. Interest rates are also unlikely to rocket really quickly unless salaries go up to match as the Bank of England do not want people to struggle to repay loans and mortgages as that could lead to lots of unpaid debt which could cripple the banks.

How student loans work

Student loans also work very differently to standard loans and this can also mean that interest should not be so much of a worry. The loans only have to start being repaid after you graduate and then only once you are earning about a certain amount. This means that you will be in a position where you can afford the repayments when you have to start making them. What you have to repay will only be a small percentage of the salary that you are earning above the threshold amount and so it will be manageable. If your salary goes down, perhaps because you lose your job, go on maternity leave or take a lower paid job then your repayments will also go down or disappear so you will always manage. This will not change whatever interest rates are. After thirty years the remaining balance on the student loan is written off. This means that it is possible for a graduate never to repay the whole loan and therefore they do not repay the interest as this is repaid last

Repaying early

If you end up being one of the graduates that does not repay all of their loan then the interest rates will have no impact on you at all. Considering that only a quarter of graduates repay their loans in full, then the odds show that you are likely to not repay it. Therefore, if you fall into this category, you do not have to consider repaying your loan in order to avoid the interest rate hikes as you will avoid them anyway. You will be able to calculate whether this is likely to be you as well and this will get easier the closer you are to getting to the end of the thirty-year period. When you first graduate you will be looking for a job and you will know whether you have something that will be in a salary threshold that you will be able to repay. You may then change jobs, be out of work, take parental leave or things like this through your career. You might be able to predict whether this will happen to you or not and you should know whether the area that you are qualified in is likely to give you a high salary. If you graduated a while ago, then you will be able to work out how much loan you have already repaid and whether you will end up paying it all by the end of the thirty year period. Repaying early is a risk as it could be that you would otherwise have not earned enough to have to repay the whole loan. However, you may want to repay it anyway as you feel that you should not be using tax payers money to find your education like this and that you would like to pay it back. However, you might feel that as you are entitled to the money and most other students do not repay their loans then you are happy with not repaying yours as well. It is a matter of personal opinion.