Money mensch: Don’t overpay your student loan

By Martin Lewis, August 27, 2009

On Tuesday, 1 September, some people’s student loans will actually start to shrink. This is because the interest rate follows inflation — the rate at which prices rise — and we currently have deflation (negative inflation).

For those with outstanding loans who started university before 1998, the interest will drop from 3.8 per cent to -0.4 per cent, meaning at the end of the year the amount owed will be smaller than at the beginning. For the bulk of the 3 million-plus people with outstanding loans though — those who started university in or after 1998 — it is only being reduced from 1.5 per cent to 0 per cent, as the government has more leeway in setting the rate here. However, as student loans are the cheapest form of long-term debt you will ever get, and are mainly interest free this year, there is no need to pay them off quicker than you have to.

If you have spare cash, pay back more expensive debts such as credit cards or mortgages. After that, put it in the highest interest savings account or cash ISA you can, as you will earn far more than the student loan is costing you.

And even if interest rates rise again in a year or two, do not be too hasty to overpay. There is likely to be a point in the future when you will need to borrow for something big, and by saving you will have this money waiting instead of having to take out an expensive commercial loan. To check how long your loan will take to pay off use

Last updated: 9:19am, August 28 2009