Lucy O’Brien has made the decision to use her house deposit savings to clear her postgraduate student loan. Like many graduates with “plan 2” student loans, she did not anticipate the financial burden that would come with pursuing a master’s degree immediately after her undergraduate studies in 2021. Four years later, she is redirecting the savings she had intended for a property deposit to pay off her postgraduate debt.
Impact of Rising Interest Rates on Student Loans
This month, the government announced a 6% cap on interest rates for plan 2 undergraduate and plan 3 postgraduate loan repayments, effective from September. This cap offers some relief to higher earners, those earning £52,885 or more, who have been paying interest rates as high as 6.2% on both undergraduate and postgraduate loans.
However, most plan 2 graduates will still experience an increase in their interest rates due to the link with inflation. Currently, plan 2 borrowers pay between 3.2% and 6.2%, but this will rise to between 4.1% and 6% in September. This increase has contributed to a growing sense of frustration among graduates who find their debts increasing despite regular repayments.
Using House Deposit Savings to Manage Postgraduate Debt
Upon reviewing her loan balance, Lucy discovered that her debt had grown from an initial £51,529 to £65,879 due to accumulating interest. Her postgraduate loan, initially £11,570, had only reduced by about £2,000 despite consistent repayments, leaving a balance of £12,737.
Calculations showed that continuing with monthly repayments at the capped 6% interest rate would mean it could take until mid-2034 to clear the postgraduate loan, with approximately £7,000 paid in interest. This would make the total cost of her master’s degree over £18,500.
Given the size of her undergraduate debt, Lucy chose to focus on clearing her postgraduate loan first. Earlier this year, she withdrew £6,000 from her house deposit savings to make a lump-sum payment, which is about half of her current postgraduate loan balance. She plans to make another similar payment by the end of next year, aiming to fully repay the loan by then.
While this means delaying her plans to buy a house, Lucy believes it is a worthwhile decision. Clearing the postgraduate loan will save her thousands in interest and free up her salary from monthly loan repayments. This will allow her to rebuild her savings more quickly and improve her credit score.
Lucy’s experience highlights the financial challenges faced by many graduates burdened by student loan debt, especially as inflation and living costs rise. Using house deposit savings to reduce debt is a strategy some may consider to alleviate long-term financial strain.