Should I pay off my student loans before buying my first home?

I would like advice about my student loan. I only studied for one year, so I don’t have as much debt as if I had completed the full degree.

I studied between 2017 and 2018, which means I have a type 2 study repayment plan. The interest rate is currently 7.7 percent.

I borrowed £9,000 for tuition fees 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 on wages above the repayment threshold in July 2023 and have been paying £9 a month since then, the amount automatically deducted.

I’ve also been saving for years and finally have enough for a down payment on my first house. However, now I doubt whether this is the best use of my money.

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

I came up with four options. Which is the best?

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

2) Postpone buying a house and pay a lump sum on my student loan

3) Keep paying just £9 a month and buy a house

4) Overpay where I can instead of saving money

> Read: How long will it take to pay back your student loan with your current salary?

Ed Magnus from This is Money answers: Repaying student loans is a problem shared by many young people today.

The problem was exacerbated in 2012 when tuition fees rose from around £3,000 to £9,000 per academic year.

How much you pay back depends on your pre-tax income and what loan plan you have. You then repay a percentage of your income above a certain income threshold.

Those in plan 2, like you, who went to university between September 1, 2012 and July 31, 2023, will start paying back their loans once their income exceeds £27,295 per year.

All students, regardless of the plan they follow, pay 9 percent of their income above the threshold.

The interest rate level is based on the retail price index (RPI) rather than the consumer price index (CPI), which is more commonly used.

Fortunately, when the RPI rose to 13.5 percent in March 2023, the government introduced a 7.6 percent cap on all loans. However, that is a very high interest rate – and certainly more than you can currently earn with a savings account.

It is understandable that, to prevent further interest accrual, you would ideally want to pay off the interest sooner.

But if that means postponing the purchase of your first home, things get quite complicated.

While student loan interest can accumulate, home prices also tend to rise in the long run, which means delaying your home purchase plans could also cost you more in the long run.

We spoke to for expert financial advice Holly Tomlinsonfinancial planner at asset manager Quilter and Jack Mundaypartner and chartered financial planner at asset manager Saltus.

What the experts say…

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

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

As a general rule of thumb, as financial advisors we are taught to look at a client’s needs in order of priority, with debt being the first need to be addressed in an ideal world.

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

It’s important to remember that a student loan is not the same as other types of debt.

For example, a student loan won’t show up on your credit score, although it could impact mortgage affordability.

Likewise, depending on which plan you have, the debt will be written off after 25 to 40 years.

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

1) Postpone buying a house and pay off your student loan in full: This is a fantastic option to stop paying interest on a debt that won’t decrease.

Especially because the interest on the loan is higher than the current average percentage growth of general savings accounts and the percentage growth of real estate over the past twelve months.

2) Postpone buying a house and pay off the loan in one go: If you have the money to pay off this student loan in full, this is a sensible option, as the money in a savings account is unlikely to earn enough interest to offset the 7 percent interest applied to the loan .

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

3) Keep paying just £9 a month (or pay too much if possible) and buy a house: Applying the same theory as discussed earlier, paying off your student loan as quickly as possible would benefit you more in the long run, even though it might mean putting your home-buying dreams on hold for the time being.

One caveat it’s wise to keep in mind is whether you would be paying rent instead of a mortgage if you didn’t buy property and pay off the loan.

If so, it is important to consider the amount of rent and ‘wasted’ money that would apply in this case.

Then it is possible to find out what would look better month-to-month – renting or owning – and whether buying the house as a priority and paying off the student loan secondarily would work out better from a financial point of view.

Jack Munday replies: The most interesting thing about this scenario is that it highlights the importance of behavior and emotions when it comes to identifying your own goals and motivations.

In this situation there is an intersection between paying off student debt or taking out a mortgage debt.

Both are forms of debt, but the crucial difference is what is considered “good debt” versus what is considered “bad debt.”

The concept that student loans are “good debt” typically stems from the fact that they are designed to enable a platform to improve job prospects and earnings.

There is also a common belief that student loans don’t impact your borrowing options, but this is a bit of a red herring.

It’s true that student loans don’t show up in the credit score unless you’ve missed payments, and this is one of the biggest factors in a mortgage.

However, repayments will be factored into a mortgage lender’s affordability calculations, and ultimately almost all financial goals and decisions come down to affordability.

We don’t know enough about the situation yet to determine the best outcome, but it is important to consider the following:

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

Repayment plan 2 means that you only pay if you earn more than € 27,295 per year. Afterwards, 9 percent of your wages above this level will be withheld, also known as the ‘union tax’.

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

Repaying the interest on a loan always ensures that the final balance is settled more quickly. However, the mortgage versus student loan debate will always be based on the individual’s longer-term goals and how they feel about debt.

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