Welcome to the second in our three part series on graduate finances. In the first post, we met recent graduate Harri Roe. We looked at her student debts – how much she owes, how much interest she’ll be paying and what it all means for her credit rating.
In this post we’ll be taking a look at how Harri should go about clearing her debts.
How will Harri pay off her student debt? How much will it cost?
You start repaying your loan the April after graduation, so Harri will start paying back her student loan in April 2013.
You only start paying back your student loan when you earn over £15,795 a year. If or when your income falls below that threshold, you stop paying. This income threshold changes with inflation.
The amount you repay each year is tied to your salary – you pay 9% of your income over £15,795.
As a junior doctor, Harri can expect to earn around £22,000 – that’s £6,205 over the threshold. 9% of this works out at £558.45 a year, so Harri can expect to pay £46.50 a month.
Harri’s employer will calculate her repayments and take it off her salary each month – so Harri should expect her April 2013 pay cheque to look £46.50 less than her March one!
If you’re self-employed and your income is over £15,795, then you can pay either through PAYE or self-assessment.
If you’re planning on going abroad to work, you must let the Student Loan Company know, so they can make arrangements for your repayments to continue.
Can you pay off your student loan faster?
Harri is lucky – she has a job lined up and she has great earning potential. Harri’s student loan payments will go up as her salary increases, but she may still have extra cash to hand – she could make bigger contributions to her repayments and reduce her student debt faster.
However, as we mentioned in the last post, Harri’s student loan is likely to be the cheapest form of borrowing she’ll ever have. If the interest rates on a tax-free ISA top the interest rates on her student loan, she’ll be better off saving her extra cash.
But if Harri had other more expensive debts – such as credit card debts or payday loans – she should definitely use any excess money to pay those off first.
If you do want to repay your student loan earlier, take a look here.
How could Harri clear her other debts?
Fortunately Harri doesn’t have other debts – such as credit card debt, loans or car finance. Unfortunately this isn’t the case for a lot of graduates.
If you have other debts, take a look at their interest rates. You’ll want to clear the most expensive debts first.
If you have run up debts on your credit card, consider switching to a 0% balance transfer credit card – the best deals at the moment are offering up to 22 months interest-free. This will give you some breathing space while you come up with your card debt-elimination plan.
Try as hard as you can to pay off your balance in full. Yes your credit card company tells you that you only need to meet the minimum repayments – but that’s only going to keep you in debt for longer. Set up direct debits to repay in full each month.
If you have lots of debts, consider consolidating all of your debts in one loan. Shop around for the lowest interest rates. Be strict on yourself – set aside money each month to repay your loan. If it means forgoing the odd trip to the pub, so be it. Show credit discipline now, and your bank balance and your credit history will thank you later.
In the final post of our series, we’ll be looking at graduate current accounts, overdrafts and why loyalty doesn’t pay.