In Nov 2021, I wrote an article about my experience with student loans: being £12k in debt.
Paying it off seemed like a long way away. However, I’m happy to share I have just paid it off!
Here are all the steps that I took to paying it off in 20 months, 4 months earlier than planned:
Step 1: I identified what my starting balance and what the interest rate was.
Step 2: I identified how much was being taken from my salary and in intertest every month.
Step 3: I saved an ‘emergency fund’ to not go into further debt due to unexpected expenses.
Step 4: I used any ‘left over’ money towards debt repayment, but also towards investing.
In this article, I start off by giving you a background to my starting situation.
I will also share my process of paying off my loan quicker than expected, even with delays.
I hope that this article will motivate you with any debts you may have – the end is in sight!
How a £10,000 loan became a £12,000 loan
In Sep 2018, I took out a UK Postgraduate Loan for £10,609 to fund my Master’s degree.
In April 2020, I started to pay back my student loan as I was earning over the threshold (£21K).
The way it works is that they take 6% of your income above the threshold from your salary.
This is automatically taken from your pay each month, so you don’t have to think about it.
I was thinking ‘this is going to paid off in no time’…that was before I considered the interest.
In Oct 2020 I decided to check my balance for the first time 18 months after my first payment.
I was shocked by what I saw: instead of my balance being lower it was actually higher by £2k.
How could my balance be higher than when I started? Because I hadn’t considered interest.
Even though I was paying each month, the interest being added was higher than my payments.
Therefore my balance was actually increase every month instead of decreasing as I assumed.
Therefore I knew I start overpaying on top of my salary contributions in order to pay it back.
Identify your Gap and Build an Emergency Fund
The first thing I did was ‘identify the gap’ between my income and expenses every month.
Say a household makes £6000/month and their expenses are £4,000, then their gap is £2,000.
That’s the first thing I did, and how to make it bigger (increase income/decrease expenses).
The next step is to then figure out what to do with that gap every month.
It’s easy to say, I’m going to use all of it to pay my loan, but there are a few steps before that.
With that money, the first thing I did was create what is called an emergency fund.
This is basically a savings account that you can use for any unexpected emergency expenses.
So if my car broke down or my phone was stolen, I wouldn’t have to go into more debt.
The first thing I did with my gap was contribute £1,000 to my emergency fund.
Once I had an emergency fund in place as a safety net, I could then focus on my student loan.
Consider your Interest Rate
Back in 2021, student loan interest rates were actually quite reasonable i.e. between 3-5%.
There is a general guideline that I like to follow when it comes to deciding to overpay on debt:
- If the interest rate is less than 3%, there is no need to overpay on your debt
- If the interest rate is between 3 and 5%, then it’s up to you whether to overpay or not.
- If the interest rate is over 5%, then it is time to start overpaying on your loan.
At the time, the interest rate was around 4%, so I decided not to aggressively overpay.
So I decided to contribute £500 a month towards debt and £500 a month towards investing.
At that rate, I calculated it would take me about 2 years to pay off my student loan in full.
So that was my plan for 2021/2022 as long as interest rates remained ‘reasonable’.
However, as we all know by now, nothing ever seems to go according to plan.
Pay it Off like your Hair is on Fire
By the summer of 2022, things started to go crazy.
Interest rates started to increase rapidly from 4% to 5% to 7%.
That means that interest rates were no longer in the 3-5% range, but had long exceeded that.
According to my guidelines, if interest rates are greater than 5%, then it’s time to overpay.
Some FIRE folks would say to focus just on repaying back all your loans first and then invest.
However, it’s not black and white, you can continue to overpay and invest at the same time.
So I decided to contribute £700 a month towards debt and £300 a month towards investing.
By doing so, I was able to accelerate when I paid off my student loans from 24 to 20 months.
It would have been even sooner, had there not been plenty of disruptions along the way.
However, I was still about to pay it off through considerable and consistent contributions.
What next? Paying Off my Mortgage?
Now that my student loan has been paid off, my only other outstanding loan is my mortgage.
Do I start overpaying or get back to focusing on investing? The answer lies in the interest rate.
Currently my mortgage interest rate is 3.86%. This means this falls within the 3-5% bracket.
According to the guidelines, whether I start to overpay or not is entirely up to myself.
However, I think that I will start to overpay on my mortgage, for a number of reasons:
- I’m currently on a 40 year mortgage. The last thing I would want is to still be paying at age 70.
- The more equity I’ve in my home, the better interest rates will be when I come to remortgage.
The plan is to cut down the length of my mortgage from 40 years to 20 years.
I hope this article has inspired you on your path to FIRE and regarding paying off your loans.
As mentioned, before you overpay any debt, take a look at interest rates and make sure to have an emergency fund.
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