Should I pay off my student loan before I buy my first home?

I would like some advice regarding my student loan. I only went to university for one year, so don’t have as much debt as if I had completed the full course.

I went to university between 2017 and 2018 which means that I am on the student repayment plan type 2. The interest is currently 7.7 per cent.

I borrowed £9,000 for tuition and my maintenance loan was around £3,000, but after interest my balance is now £17,792.89. Last year, £1108.02 interest was added.

I started my first job with a wage over the repayment threshold in July 2023 and have been paying off £9 per month, the automatically deducted amount, since then.

I’ve also been saving for many years and have finally got enough for a deposit on my first home. However, now I am debating whether this is the best use of my money.

> Read: Why financial experts say you should NOT pay off a big student loan

Our reader’s dilemma: Should they clear their student debt or buy a house?

I have come up with four options. Which is the best?

1) Put off buying a house for now and use my savings to pay off my student loan in full

2) Put off buying a house and pay a lump sum amount into my student loan

3) Continue to just pay £9 per month and buy a home

4) Overpay where I can, as opposed to saving the money

> Read: How long will it take you to repay your student loan on your current salary?

Ed Magnus of This is Money replies: Student loan repayments are a problem shared by many young people these days.

The problem was exacerbated in 2012 when fees jumped from roughly £3,000 to £9,000 per academic year.

How much you repay depends on your income before tax and what loan plan you’re on. You’ll then repay a percentage of your income over a set income ‘threshold.’

Those on plan 2 like you, who went to university between 1 September 2012 and 31 July 2023, start to repay their loan once their income is more than £27,295 a year.

All undergraduates, regardless of the plan they’re on, pay 9 per cent of their income over the threshold.

The level of interest has been based on the Retail Price Index rate of inflation (RPI) rather than the Consumer Price Index (CPI), which is more commonly used.

Fortunately, when RPI jumped to 13.5 per cent in March 2023, the Government introduced a cap of 7.6 per cent for all loans. However, that’s a very high interest rate – and certainly more than you can currently earn from a savings account.

It is understandable that to avoid further interest accumulating you would ideally want to pay it off sooner.

But if that means delaying buying your first home, it rather complicates matters.

While the interest may accumulate on the student loan, house prices also tend to rise over the long term, which means that delaying your home buying plans could also end up costing you more in the long run.

For expert financial advice, we spoke to Holly Tomlinson, financial planner at the wealth manager, Quilter and Jack Munday, partner and chartered financial planner at the wealth manager, Saltus.

What the experts say…

Holly Tomlinson replies: Although this query is specifically about a student loan, it represents one of the most frequently asked financial questions: should you clear a debt or buy a house?

Many people face the predicament of not being able to save for a home, without throwing in the added burden of increasing student loan costs.

As a general rule of thumb, we are taught as financial advisers to look at a clients’ needs in an order of priorities, with debts being the first need to address in an ideal world.

Expert: Holly Tomlinson , financial planner at the wealth manager, Quilter

In reality many people see a property as their most important financial desire. Not only does it get you on the escalating property ladder, but also eliminates the prospect of paying rent, which many see as money down the drain.

It is important to remember that a student loan it is not like other types of debt.

For example, a student loan does not appear on your credit score – though it can impact mortgage affordability.

Similarly, depending on what plan you are on the debt will be written off after between 25 and 40 years.

When deciding which way to turn, looking specifically at the options you have presented I would consider the following:

1) Put off buying a house and pay off the student loan in full: This is a fantastic option to stop paying interest on a debt that isn’t decreasing.

Especially as the interest rate on the loan is higher than the current average percentage growth of general cash savings accounts and the percentage growth on property in the last 12 months.

2) Put off buying a house and pay off a lump sum of the loan: If you have the funds to clear this student loan in full then this is a sensible option as any money sat in a cash savings account is unlikely to make enough interest to compensate for the 7 per cent interest being applied to the loan.

However, if a partial payment can only be made this would still be sensible considering the same theory.

3) Continue to just pay £9 per month – or overpay where you can – and buy a home: Applying the same theory as discussed before, clearing the student loan as soon as possible would benefit you more in the long run, even though this might mean putting dreams of buying a house on ice for the time being.

A caveat which is sensible to bear in mind is whether you would be paying rent instead of a mortgage if you didn’t buy a property and cleared the loan.

If so, it’s important to consider how much the rent would be and the ‘wasted’ money that would apply in this instance.

It is then possible to work out what would look better on a monthly basis – renting or owning – and if purchasing the house as a priority and clearing the student loan second would work out better from a financial viewpoint.

Jack Munday replies: The most interesting thing about this scenario is that it highlights the importance of behaviours and emotion when it comes to identifying your own objectives and drivers.

In this situation, there is a crossroads of paying off student debt or taking on mortgage debt.

Expert: Jack Munday , partner and chartered financial planner at the wealth manager, Saltus

Both are forms of debt, but the vital difference is what is perceived as ‘good debt’ versus what is seen as ‘bad debt.’

The concept of student loans being a ‘good debt’ is typically because they are designed to allow a platform to improve job prospects and earnings.

There is also a common belief that student loans do not affect your borrowing ability, however, this is a bit of a red herring.

It is true that student loans do not show on a credit score, unless you have missed payments, and this is one of the biggest factors with a mortgage.

However, the repayments will be factored into a mortgage lender’s affordability calculations, and at the end of the day, almost all financial objectives and decisions boil down to affordability.

We do not yet know enough about the situation to consider the best outcome, but it’s important to consider:

The reason these factors are important is that mortgage debt is static, while student debt is on a set payment schedule.

Repayment plan 2 means you do not pay until you earn over £27,295 per annum. After that, 9 per cent of your wage above this level will be deducted – sometimes referred to as the ‘uni tax’.

Another thing to consider is whether the individual might take a career break in future. If they did, the student loan repayments would stop but the mortgage repayments would continue.

Repaying the interest on any loan will always ensure the final balance is cleared faster. However, the mortgage versus student loan debate will always be based on the longer term objectives of the individual and how they feel about debt.

They should speak to a professional to discuss this and get specific advice for their circumstances.