Should I Pay Student Loans or Build an Emergency Fund?
This blog is for you if you are solely responsible for paying student loan debt. A large number of students or graduates live paycheck-to-paycheck. With rental payments, stationery, and incidental expenses covering most of your costs, one could hardly save for student loan repayments.
Conversely, if you are a college graduate with debt and share good employment opportunities, you must wonder whether you should pay the student loan debt or build an emergency fund.
Both goals are noble. One must prioritise finances based the income capability and urgency.
How Much is The Current Student Loan Debt Payment?
The amount you currently pay and may pay in the future depends on your student loan plan and your earnings. You must pay 9% of the total student loan over a set threshold.
1. What Repayment plan Do I have? When should I start making payments?
Whatever repayment plan you are on, you will start the payments only after completing graduation. Inform SLC as soon as you grab a good job opportunity after graduation. As a student, you be on either of the repayment plans:
a) Plan 1-( started an undergraduate university course before 1st September 2012)
- You can start paying the repayments if you earn above £19,480/annually, £1615/month or £372/week
- In this way, you will pay 9% of your income in this threshold
b) Plan 2- -( started an undergraduate university course after 1st September 2012)
- You begin paying repayments after earning £26,575/year, £2,214/month, or £511/week.
- You pay 9% of your income on this threshold.
Like your tax and National Insurance deductions, student loan payment gets deducted at the source. It implies the authority deducts it from your salary before it finally shows in your account.
If you encounter an urgent expense and cannot wait until payday, resort to a £10000 loan on bad credit with no guarantor. Students and undergraduates have a million things to cater to at once. Whether rent or paying the tuition fee, you can qualify with a 2-minute loan quote.
It eliminates any requirement of a guarantor or third person to qualify. You can attend to urgencies and improve your credit score by being responsible with payments.
Should You resume repayments soon after getting a job?
Usually, if your earnings are top-notch, overpaying a debt you owe seems like a sound financial decision. The loan repayment duration depends on the student loan debt repayment plan, as mentioned above. But when one talks about paying student loans in advance, there may be better ideas than paying student loans in advance.
The reason is student loan debts get written off after 30 years. The remaining debt and interest rate on the student loan after 30 years becomes nil. Or if you reach 65 years of age until paying the student loans. Whichever comes early. Most individuals do not complete half the loan by that time. Considering paying or clearing off a student loan debt may be a waste of money.
Moreover, student loan debts do not make it to the credit report. Thus, it will not impact your credit score even if you are yet to clear it. If you never earn over £27,288, you can run clear of student loan debts. You do not have to pay anything if your earnings never touch the threshold.
Therefore, individuals earning a good salary, like £50,000/month, can consider paying off their student loans. These individuals may expect to earn double in the next 30 years of the student loan debt tenure. Whether you pay or not, the interest amount keeps spiralling. If you have some outstanding loans to take in the next few months, paying off student loans could be a good option.
Other aspects to consider before paying student loans
Before paying the student loans, consider the following aspects:
- Do you have high overdraft loans to pay?
- Do you need to optimize your credit profile immediately?
- Do you have other high-interest loans like credit card debt to pay?
As it is apparent until now that not paying or delaying paying the student loan would have little or no impact on your well-being and credit score. However, prioritizing student loans when you have other high-interest debts can ruin your credit score and impact additional borrowing capacity.
You only have to pay student loans if you earn above a particular threshold; thus, you share no risk of falling into debt. Conversely, you can do so if you only have a high-interest student loan and believe you can pay it within the due tenure. But there are better options than doing so.
What if you have no other high-interest debt? What should you do with income?
If a student loan is the only high-interest debt you share, you have good options to make the best use of your disposable income.
Most people consider dedicating a part of their savings to ISA, savings account, pension or retirement fund, or Fixed deposits. If you believe that you may not clear the student loans, you’re your current salary; you can switch to better investment options.
- You can save for a deposit for a mortgage
- Save for a deposit to buy a new car loan
- Invest in your child’s education
- Getting and preparing the home for renovation
And the most important and the best way to make the best use of the amount is- to set up an emergency fund.
Why set up an emergency fund instead of paying student loans?
When a student begins earning and accumulates saving for up to 6 months, it is ideal to have an emergency fund. Students or undergraduates may face a crisis or unprojected incidents needing immediate attention/solution. With students a little reckless towards savings, presenting urgent money is challenging.
Living from paycheck to paycheck eliminates any possibility of saving much towards the emergency goal. However, you must open the possibility of establishing an emergency fund. It is the go-to thing when you run out of cash and cannot qualify for a loan.
If extra money is hard to come by, consider downsizing the additional discretionary expenses or giving up a subscription you can live without. In this way, you can easily balance the student loan payments (only if you must) and build a safety pot simultaneously.
How To Build an Emergency Fund?
An emergency or contingency fund helps you face a medical scare, sudden job loss, or unavoidable house repairs. It also helps sustain the unemployment phase. It keeps you afloat without you having to resort to any further help.
You must ensure savings for up to 6 months in an emergency fund if you are single.
If you are a family with kids and only one earning member, the amount you save should ideally cover 12 months of living expenses.
Here is how to create an emergency fund:
1) Decide the amount you can tangibly save
Before beginning the saving game:
- Analyze your income and outgoings.
- Subtract liabilities and outgoings from the income.
- Decide how much you can save each month from the amount you are left with.
2) Set up a separate savings account
An emergency fund should be separate from your other savings account. It would help if you did not tap these until utmost necessary. Set up an automatic pay cut to save in the emergency fund.
Students or graduates must prioritize their financial goals before paying off student loans. If your salary bracket is suitable, you can go for it, else – you can make only part payments to keep up with the interest rates. Set up an emergency fund to ensure a good backup of the remaining income.