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BLOG: ‘NS&I’s rate cut prompted me to pay off my student loan early’

Paloma Kubiak
Written By:
Paloma Kubiak

Many graduates ask whether they should pay down their student loan ‘debt’ for fear it will impact future credit and mortgage applications. For me, it was NS&I’s brutal rate cut that spurred me on to fully pay off my student loan a year early.

University seems like a lifetime ago now – the best and some of the hardest times as I started a new chapter in my life, full of dreams and aspirations for adulthood.

After a fun-filled gap year, I started university in 2004 and graduated in 2007. As I was eligible for the maximum maintenance loan payment (circa £12,000 over the course), I watched in horror as my annual statements showed interest accruing on this amount each month and there was little I could do but ignore it for the time-being.

In the ‘good times’, the interest rate hit 0% in 2009 in the aftermath of the financial crash. But I had also been charged as much as 4.8% in the run up to the crisis.

In my latest statement covering all debit and credits between September 2004 and February 2020, interest of £2,300 had been applied and I only had around £2,300 to pay off the student loan in full.

As I approached the end of my debt, I switched to direct debit payments rather than the amounts being taking from PAYE. This is so graduates don’t end up overpaying their loans.

While previously I made overpayments even when I was earning below the required threshold in order to pay back the loan faster, now I was again thinking about paying it off once and for all.

And for me, what prompted this decision was NS&I’s severe rate cuts. I had savings in the easy access Income Bonds product which was earning 1.16% AER. But in November, the rate was slashed to just 0.01% AER.

Meanwhile, my student loan – just over £1,000 as of January 2021 – was accruing interest of 1.1%. It was a simple thought process: ‘Why should I be charged this level of interest over the next year when the interest I’m earning on my savings is a pittance?’

With no other debts – apart from a mortgage which we’re already overpaying within the annual limit to avoid a penalty – and a range of short, medium and long-term savings and investments, I felt this was the right choice for me, taking into consideration my family’s financial circumstances.

And with another baby on the way and a remortgage due in 2021, it’s nice knowing I won’t need to fork out three figures each month on this student hangover.

Now, this won’t be the right decision for everyone, so I suggest you have a read of Martin Lewis’ excellent guide on Student Loan Repayments – is it better to save or pay it off? before making a choice.

Paloma Kubiak is deputy editor of YourMoney.com