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Student Loans Lead the Students into Debt Spiralling
Most students are into a panic situation soon after they come to understand that their debts are into death spiral, after the interest rates have been added to the principal loan amount. The overall size of loan is increased massively, and this is where critical situation begins to build up. Many times, students do not have any plan, let alone the contingency plan for repaying the debts they hold against the loan. And with the rising interest rates, everything gets into a serious turmoil.
The idea moving behind among students is that interest rates are reduced considerably. Does overpaying lower the interest rates? One has to be judgemental out here. Consider here a situation where the graduate is already absorbed in some kind of high-paid employment, and the employment is stable. In this kind of situation, overpaying is a good idea altogether.
Lets understand the whole concept with practical figures.
Graduating individual with wages approximating 36,000 a year is likely to repay around 40,500 out from the 55,000 total student loan in the time span of 30 years, with the most current (July 2017 August 2017) repayment rates prevailing in the UK market. The rest of debt is cleared off after timeframe of 30 years. However, if the same graduating individual graduate reduces the total 55,000 balance straight to 45,000 against an overpayment of 10,000, he is still repaying the same amount of student loan spread over 30 years. The idea of overpayment has no point here in real sense.
In the loan market of the UK, student loans are acknowledged as Political Hot Potato, for reasons known to many. And for the graduating students, the term student loans are nothing but wrong name, over popularised for the heck of losing money. It would be a good thing if Student Loans had a more appropriate name - Graduate Contribution System. Changing the name would help student fraternity to identify the loan with respect to their needs and more importantly better financial decisions are made.
Why Aggressive Overpayment is Not the Logical Recourse
There is a more logical reasoning that works behind overpayments and it is very important to understand then lament later on.
Reasoning#1
If You Have Flexible Debts, Pay them off First
Some student loan lenders provide benefits such as the income-based repayment plans or even refinancing. If this is the scenario, you graduate can adjust the loan payments in the manner such that financial difficulties are reduced down to a naught. You do not have to keep the flexible debts piling up for the torture, if not at the hands of The Satan.
Reasoning#2
Do You Have Funds Saved for Emergency Situations?
An emergency fund is your financial vanguard in situations not in your control. Guess the situations If car breaks down; Need for Pet Surgery; Family Matter Arises; Home Repairs. These situations are not affordable and one ends up into vicious debts. In span of few years this debt is going to rise and you will be struggling. If your parents have not done it for you, be the self starter. Open a bank account, and start saving for the emergency rather than running to overpay the student loan.
Reasoning#3
Are there Any Large Expenses to Come Your Way?
It is not necessary to carry forward your debts for the sake of nothing. But, in situation where your miscellaneous expenses outgrow, you need to give a backseat to the student loans. Appearance of sudden expenses in the form of wedding, or a surgery, or planning a yearlong trip to exotic destination, can throttle your financial condition, especially, when you have limited funds, and no one to ask from.
Saving and paying extra on your student loans is not the sane and wishful thing that you are going to do. You have to be honest with yourself to list your priorities. What should come first, and what should not! Do you intend to overpay the loan with the purpose of lowering the interest rates? Or do you want to have sufficient savings to cope large expenses?
Planning for Your Retirement? Are you Judging the Interest Rates in a Fair Way
If the current interest rates running on your student loans are low (say it is settled between 2% and 3.5%), you may feel happy. Theoretically it seems a bit correct, but you have long timeframe to repay the loan. If you are planning your retirement, you have to start saving money for it. The sooner you begin to save for retirement, more is your balance. In this kind of situation, you can still consider of overpaying the debts.
Play the Game in Right Way
Good or bad, you know what has to be done, and what would really improve your financial situation. Remember, if your savings are dried up; start building up one, instead of thinking of overpayments. In case, you have high interest debts running on your current student loan, good strategy is to pay it off without stretching to the last days. Your financial goals are more critical than making overpayments. Even with consistent repayments spread over regular period of time will make your situation better before the borrower.
Gaining knowledge through formal education is self development, but managing the loan and keeping it under control, is where you need to start looking for a different approach.
