Yesterday we said we were going to pay back our student loans because we thought that was the rational thing to do. A couple of commenters helpfully pointed out that student loan repayment policies have changed recently. The 10% lump sum repayment bonus we’d relied on when assessing our choices, has been removed. Boo.
Where does that leave us? Needing to think in a bit more depth, but still ending up at the same conclusion. It still makes sense to pay back your loan if the interest you’ll incur while overseas is greater than the value inflation will erode when you’re paying back the minimum at home. Interest is 5.5%, and you might assume inflation is 2%. On that basis, here’s a half decent rule of thumb:
- if you think you will be away for less than half the amount of time it would take you to pay off your loan at home, you should wait to make your minimum repayments when you get home
- if you think you will be away for more than half the amount of time it would take you to pay off your loan at home, you should repay it in full as soon as you can.
In our case, assuming constant income (which is depressingly conservative) we would expect to bash through the rest of our loans in about three years. But, assuming we get the chance, we expect to be working overseas for more than half that period so, again, we’ll be paying off our loans.
The closer you estimate you will be to being away for half the time to pay back at home, the more skeptical you should be about our rule of thumb, and the more it would make sense for you to delve into detail, using more nuance, and some more specific assumptions.