Student loans can be a big concern both for students, their parents and graduates who took out a loan. When statements arrive or if there is news about rises in student loan interest rates it can be a worrying time. There is a big misunderstanding though about the student loan system and it is important that you do not worry unnecessarily about them.
About student loans
A student loan is a sum of money that can be borrowed to study in higher education usually at university. The loan that will be offered will cover the university fees and then the student’s family will be means tested to see how much more money they can borrow. More money is leant to those families that are not so well off, so those that are better off will have to help out their children by giving them extra money so that they have the same as everyone else. The April following graduation is when the first loan repayments have to be made. These only have to be made if the graduate is earning above a certain threshold and they money is taken out through their tax code so the repayments are very different to a loan. In many countries that have a similar scheme they call it a graduate tax scheme rather than a loan which avoids confusion with regards to the repayments. These repayments will whittle down the loan and then after thirty years any remaining loan will be written off by the government. Some graduate, probably about a quarter, will have repaid their loan in full by then. Many will not, partly because they have not got a high income for long enough during the repayment term or because they have taken a break in their working life, perhaps to have a family or travel.
About interest rates
When student loan interest rate rises are announced it is common for people to worry about the increasing cost of their loan. However, because most people do not even repay all of their loan, then this will make no difference at all to them. This is because they will never repay any of the interest and so change sin it will make no difference. Obviously, those graduates that do manage to repay their loans in full will have had to pay more interest. However, if they are completely confident that they will be able to repay the loan in full, then they may benefit from repaying it early. This can be a gamble though as we never know what our salaries might be in the future or if we will have any gaps in our careers.
Repaying the loan
It is also important to realise that even if interest rates go up on student loans, you will not have to repay any more. The interest is not added on to the payments that you make in the way that it is with other loans. With student loan you repay a percentage of your income once your income passes a certain threshold. This will be the same regardless of either the interest rate or how much you owe. The difference it could make is towards the end of the term. If you have not borrowed that much money, then you may end repaying it all and the interest before the thirty years are up. This may also be the case if you are a high earner for a long length of time. However, you will still not be paying any more back each month, it will just mean that you will be starting to pay back the interest rather than just the loan that you borrowed.
It is rather a confusing situation because of the way that it is named and set up and the fact that it is so different to any other. Then, when you get your yearly statement it can look really scary because of the extent of how much you are borrowing. It is best to not really worry very much about it. You will not necessarily need to repay all of it anyway and the interest, which can look the scariest is the bit that you are least likely to have to pay. It is best to really ignore the statement, as the amount you will be paying in your tax code will not be changing and so you will see no difference in your finances as a result.
It is worth noting that if you get a post graduate loan that you will have to repay this alongside your student loan and so your graduate tax will be higher as a result of this. The rules are the same as with a student loan though in the way the repayments work and so you may not have to repay the full loan and your repayments will be set according to your earnings.Continue Reading...
When the Bank of England base rate goes up, it can create stress for borrowers. They may feel that they will be charged extra and they need to move to a cheaper lender and it may even be a cause for panic. It is worth considering changing lenders but you do need to be sure that you are doing the right thing and doing some checks to ensure you will be financially better off.
Beware of hidden costs
It is worth making sure that you are aware of any costs of switching lenders before you start. Firstly, check with your current lender to see if there are any costs of switching lenders. If you are tied in to a fixed rate, for example, you may find that the costs can be extremely high, perhaps thousands of pounds. This rate will vary between lenders and some may not charge at all. You do need to be sure that you are aware of the costs though. Consider this also with the new loan that you are looking at. They might have a charge for leaving and so if you want to switch again in the future this could be costly. There may also be costs for taking out a new loan. These costs could include admin fees for starting up an account and again, they will vary. You will need to look into these as well. Once you have this information you will need to calculate whether you think that the cost is worth it. It will depend on the difference in interest rate and how much you think that you will be able to save. If the difference is small then the costs may outweigh it but if the difference is large, then it might make it well worth paying the fee so that you can switch and start saving money.
Compare all lenders
You need to make sure that when you are looking at interest rates that you compare all lenders. Do not just look at an advertised rate in a building society window, on an online banner or in a newspaper and decide to go for it. It is important to make sure that you look at all lenders or at least a much bigger selection as although you might be switching to a cheaper rate, you may be missing out on even better deals. There are websites which will have information on the best deals and these can be worth looking at in order to decide whether you want to take advantage of one or not.
Consider how often to do it
It is also worth thinking about how often you want to compare interest rates. If you wait until the Bank of England changes their rate you may wait years or you may be looking every month. It is probably sensible to take a look every six months or year just to see how competitive your loan is. This will mean that you are not doing too much work but you are still likely to be able to find and take advantage of good rates. Doing it too often could be tiresome and if you keep switching it might have a negative effect on your credit report as lenders may not want to lend to you if they think that you will be switching quickly or they may see it as an indication that you are struggling with repayments so having to switch.
So it is really important to think about whether it is wise to switch when base rates change. When they rise, it is likely that many lenders will put up their rates and so the one that you are with will still be in the same position in the market. If you are keeping abreast with lenders and their rates, then you should already be with one that suits you and so it may not be necessary for you to switch at all. However, if you have not checked rates for a long time, then it could be a good opportunity to do so and to see whether you are paying more than necessary. Beware of switching too hastily though as you may have charges associated with moving away from and into different loans. Check out these fees and make sure that it is still worthwhile to switch. It can take some time and effort to do this research but it is worth it. If you switch without proper calculation, you could actually end up switching to a lender that will cost you more money and completely defeat the object of switching. So be cautious but do look into it as you could end up saving a significant amount of money. It is wise to keep regular checks on lenders and then you can see whether the rates you are paying are competitive.Continue Reading...