Many students opt for a student loan at the Education Executive Agency. This is a relatively cheap form of borrowing with a lower interest rate than the interest rates applied by banks. Moreover, you can take 15 years to pay and you only have to start doing this more than a year after your studies. Because of these benefits you quickly figure out how much this loan costs.
Repay or save – Study debt costs
You pay interest on your study debt. As long as you do not pay back, EEA will add the calculated interest to the debt. You then also pay interest on this interest. So the amount of your debt rises extra fast. The amount of this interest changes every year. From the moment you start repaying, EEA sets the interest for that moment for 5 years each, so that you know where you stand.
Compared with a loan from the bank, this interest rate is very low on a student loan at EEA. At the bank you pay an average of 6 to 9 percent interest. But make no mistake: the interest from EEA also has a significant impact on costs. Suppose you have a study debt of 10,000 euros in a certain year at 2.2 percent interest.
You pay 220 euros in interest in that year. And because a student loan quickly runs for 20 years, you end up paying a lot of interest. Certainly because you do not initially start paying off, but pay off the interest. Only when you have paid the interest do you actually start paying off the student loan. And even then the interest continues.
Pay off your study debt or not?
You might think that it would actually be cheaper to keep saving, especially if the savings interest is higher than the interest you pay on the study debt. But keep in mind that you also pay interest on that interest, which means that you actually pay more interest than just the given interest rate at that time.
Nevertheless, saving instead of paying off the student loan has a number of advantages:
- Sometimes a savings account indeed yields more than the debt costs.
- If paying off the student loan means that you are going to borrow from the bank to buy a car, for example, you are more expensive. You then better choose to use your savings for the purchase of the car.
- The part of the study debt higher than 3,000 euros or 6,000 if you have a tax partner is deductible in box 3. So if you have assets of more than 30,360 euros or 60,720 euros if you have a tax partner, you save capital gains tax.
- You need a financial buffer on your savings account to be able to pay unforeseen costs. It is better not to use this buffer to pay off your student loan.
The most important weighting factors from the list above are the financial buffer and the major expenditures in the near future. Paying off extra on your study debt makes no sense if this means that you have to borrow from the bank for other things or go red on your checking account. This costs much more than the student loan. But if you do not need the money for other things, you make a calculation for yourself to determine what is more beneficial for you.
Additional repayment of student loan mortgage
The bank takes your study debt into account when calculating your maximum mortgage. With a student loan you can therefore take out a lower mortgage than without a student loan. Although the study debt counts less heavily than other debts and loans, it quickly saves tens of thousands of euros on your maximum mortgage. Even if your partner has no study debt, you may take out a lower mortgage.
To be able to take out a higher mortgage, it is certainly wise to pay off your study debt.