In the UK, the average student loan debt is £45,800. While this may seem like a staggering amount, the reality is that many graduates need not worry about paying it off. This blog post will explore why paying off your student loan early may not be the best decision and how you can make your debt work for you.
In the UK, graduates pay 9% of their gross salary over a certain threshold towards their student loan. If you have a post-grad loan as well, you may pay up to 18% of your salary towards these loans. However, the good news is that after 30 years, the remaining student loan balance gets wiped out. Therefore, not many people end up paying off their whole loan.
Moreover, those who end up paying off their loan tend to be top earners, such as investment bankers, CEOs, traders, and entrepreneurs. Therefore, the vast majority of people need not worry about paying off their student loans as they will not earn enough to repay the full amount.
Another factor to consider is the interest rate on your student loan. For those in Northern Ireland, Scotland, England, and Wales who are 29 years and older, the interest rate is 2.75%. Inflation is currently at 10.1%, which means that the real value of your debt is decreasing over time. This means that while the interest rate is higher than inflation, your debt is becoming smaller and smaller.
For those in England and Wales who are under 29, the interest rate is 3%. After accounting for inflation, you pay an interest rate of about 0.75% and 3%. However, the S&P 500 has made an average annual return of 10.7% over 65 years. After taking inflation into account, this translates to about 8.7%. Therefore, investing your extra money into the S&P 500 could be more financially beneficial than paying off your student loan.
In conclusion, the average UK student loan debt may seem daunting, but it may not be necessary to worry about paying it off. The vast majority of graduates will not earn enough to repay the full amount, and the interest rate on the loan is relatively low compared to potential investment returns. Instead, you may be better off investing any extra money you have in the stock market and letting inflation work in your favour.