Should I Worry About Interest Rate Increases if I have a Student Loan?

Interest rate increases can be something that can be a worry for people who have borrowed money. Students and graduates may also worry about this as it means that the interest on their student loans will be higher. However, this is not something that all of them should worry about. This is due to the unique way that student loans work compared with other types of loans.

About student loans

Student loans are very different to other types of lending for a selection of reasons. This is because they are set up in a unique way. Firstly, not all students repay all of their loans. Only about a quarter of graduates actually repay the full amount. This is because they are written off after thirty years. The loans only have to be repaid once graduates are earning a certain amount of money. Therefore, those that start with low earnings, have breaks in their career or earn low throughout their careers will find that they will not be earning enough all of the time to have to make loan repayments. If they do not make all of their loan repayments then after the thirty years, they will have the remaining balance paid off for them. This includes any interest that has been added on to the loan and therefore most students will not even repay any of the interest that is due on their loans.

Interest Rate effects

Changes in the Bank of England base rate can sometimes be added on to student loans. This means that the interest rates can go up but they may also fall if rates go down. These rates will effect the amount of interest charged on the loan and therefore can go up and down. There will always be some interest charged on it but the amount can vary. Over the thirty years that the loan is held this could potentially fluctuate quite a lot.

Often when rates on student loans go up the media get all excited with articles saying how much more expensive student debt will be and what a burden it will be to graduates but it is worth keeping things in perspective. Firstly, rates go up to try to keep inflation down and therefore to stop prices rising. If the rates did not go up then prices could rise and so instead of the loan being dearer all other items could be instead and so all of your expenses may be rising in price very quickly so it could be dearer.

The most important point to remember though is that most graduates do not repay the full amount of their loan. This means that they will not be repaying the interest part of their loan. Therefore, any increases in interest will not have any impact on them at all.

Should you worry?

So, the only students and graduates that will be affected by interest rate increase are those that are higher earners. They are likely to be earning enough to make their repayments. However, if they have a break in employment then they may still not repay the full amount of their student loan. Whether you should worry about it will therefore depend on whether you think that you are likely to repay the loan in full. If you are going to have children and work part-time for a while then this could mean that you will not earn enough to repay the loan. If you go into a job which is not well paid then you will not have to make repayments. If you have any time when you are out of work then you will not be making repayments. It is hard to predict but you may have some idea as to whether you think you will be working continuously at a high salary for 30 years or whether you think you are unlikely to do so.

Even if you are working full-time and expect to repay your loan in full you should still not worry. The repayments are set up so that they are affordable. They are automatically taken through your tax code, so you do no even see the money or have to worry about the repayment as it happens automatically. This will mean that you do not have to even think about the repayments. You will also be a high wage earner if you are repaying the maximum loan amounts and so you should easily be able to afford the repayments anyway.

It is therefore best to totally ignore interest rates and any media reports about its effect on student loans. You should just get on with earning and let the repayments take care of themselves. You should feel relaxed that you will be able to afford the repayments as they are means tested and so even with an increase in interest you will be able to afford them.

Should I Pay for my Holiday on my Credit Card?

Paying for a holiday is something that you should really think about, especially if you’re looking for a way to reduce stress. Many people enjoy having a holiday and find that it has a significant impact on them and their stress levels as well as giving them valuable family time. However, they can be expensive and we have to find the money to pay for them. This is not always easy and some people will choose to borrow the money in order to pay for it. This could be by various means but credit card is something that many people choose to use both to pay for the holiday but also to spend on when they are there.

Costs of a credit card

A credit card can be an extremely convenient way to pay for things. However, it can be expensive and it is worth understanding how it works so that you are aware of how to calculate the costs. A credit card costs nothing to use if you repay the full outstanding balance when the bill arrives. You will be given a date when you have to repay the full amount before interest is charged. However, if you do not repay it in full you will be charged interest and the bill will tell you how much this will be. You will have to repay this interest and you may also need to repay a small amount of what you owe in what is called the minimum repayment. The following month the same will happen. As you repay the interest each month you may find that it is difficult to work out exactly how much interest you are paying. It may feel like it is really cheap because you are paying off that interest each month. However, if you note down how much you are paying and add it up, you will start to see how much it is actually costing you.

If you use the card to draw out cash for your holiday, particularly if you are abroad then there will be a large fee associated with this. You will normally start being charged interest on that money as soon as you withdraw it and so it can be considerably dearer.

Repaying the card

As you are not forced to repay much of the card each month the debt can hang on and on. You could find that you never clear the debt if you keep using the card and spending on it and then only repaying the minimum. It is wiser to repay the card in full every time that you get a bill. However, if you want to use it to pay for a holiday then you may find that you do not have enough money to cover the costs of it. Therefore, you may not be able to repay it in full and you will have to pay interest on the outstanding balance. It could mean that you spend all of the time until your next holiday or even longer trying to repay the debt.

Consequences of using a card

Credit cards are expensive ways to borrow and so it will be costly to use a card to pay for the holiday. With no structured repayment schedule, you may find that it takes a very long time to repay and so the debt will hang around for a long time. You may find that the stress of the debt could mean that any relaxation gained by the holiday is soon outweighed by the stress of the debt.

It could be that you will be better off saving up for the holiday and waiting to go so that you have no debt stress when you return. You may also find that if you choose an alternative way of borrowing with a regular repayment schedule you will be able to get it paid back more quickly and this should be helpful as well. It is therefore worth thinking hard about whether you want to borrow and how much you want to borrow so that you can decide whether it is worth doing this for a holiday.

It can be easy to think that a holiday will be well worth it especially if you are taking family members that will find it fun and not be affected by the debt. However, if you can get into the habit of saving up then you will not have to worry about debt when you go on holiday. Maybe if you miss a holiday for one year, you will have time to repay any debt you have as a result of previous holidays and save up for the next one. You might even begin to find saving up like this fun and choose to do it for other purchases as well. You will then find that buying things is significantly cheaper compared with borrowing money to buy them.