Wealth Check: 'Should I pay off my student debt now or later?'

Michael Brooks graduated from university this year and recently started working as a junior project manager for Unilever. He is currently earning £24,000 per year and lives with his parents in Hemel Hempstead.

Having just finished his studies, he is worried about how to clear his student debt. "Despite being careful with my spending at university, it has left me with a large student debt and very little in my current account," he admits. He wants to know if he should be making overpayments on his loan now while interest rates are low.

Michael, 21, is also planning to rent his own property in London within three years, and hopes to buy within seven years. However, with the high house prices in London and the little savings he has, he is unsure how to achieve this goal. Thinking about the future, Michael wants to know if he should be paying more into a retirement scheme now.

Case notes

Annual income: £24,000
Annual expenditure: Tax and NICs: £5,516.35
Living expenses: £1,800
Holidays: £0
Savings/insurance: £600
Pensions: £1,200
Other costs: £3,880
Total: £12,996.35

Advice this week comes from Nick Evans of One Life Wealth Planning, Diane Weitz of Ashlea Financial Planning, and Lorreine Kennedy of CareMatters...

Pension

Michael has done well getting a place on a graduate scheme and is earning a much higher salary than the average graduate. The fact that he is considering retirement schemes so thoroughly is both impressive and unusual, says Kennedy, as the average age of starting a pension in the UK is 28.

However, Evans warns that Michael must look at the broader picture and consider his short-term goals before putting additional payments into a pension scheme.

"Money saved in pensions means it's not available for other things," he points out. "It therefore comes down to the timescales Michael sets himself to achieve other savings goals such as a car or house deposit. That said, an additional £100 per month into a pension now would pay huge dividends in the long term."

Michael's pension scheme is particularly valuable, says Weitz. "It's a career average scheme which takes a contribution of 5 per cent salary from the employee and provides benefits of 1/60th of his salary for the current year. It means each year that Michael remains with the company he will gain a defined benefit of 1/60th of that year's salary."

Kennedy suggests that Michael could make larger contributions now if he wishes but says "as his immediate needs are to generate liquid assets, I would not recommend tying up his money to age 65 other than by making the current 5 per cent payments".

Savings

Michael should take advantage of the tax-free interest in an ISA and use the annual cash allowance of £5,100 to save for emergencies and buy a car. Weitz says that the best rates are currently around 2.7 per cent, so Michael should check his account matches that. She also recommends that he increases his monthly savings to make the most of an ISA.

"As Michael's salary increases, the savings will become increasingly valuable, as the interest is free of tax," she says. "I would recommend building up an emergency fund of around £12,000. Saving £200 a month into the ISA over four years, in addition to the lump sum of £2,000, should produce around £12,300 at current rates."

Student loan

A deduction of £65 a month, or £780 a year of Michael's salary is being made though PAYE towards his student loan. Although the loan interest was 0 per cent for a short period of time last year, it is not going to rise dramatically and so will remain a very cheap form of debt. Evans recommends that Michael pays off his overdraft before he worries about paying off his student loan for that reason.

"While it may go against his natural instinct, there is an argument to suggest Michael should consider using his savings to pay off your overdraft immediately. Even if you delayed any new savings for a while, it's still likely to take you at least three months to clear your overdraft just through income," he points out.

Buying a property

Kennedy warns of the difficulties of taking first steps on the property ladder. "As a first-time buyer Michael will need savings of around £25,000 to provide a deposit and fees associated with house purchase," she warns.

"Without parental support or financial encouragement from the government Michael may find himself in a similar situation as many other first-time buyers – unable to buy for the foreseeable future." However, she recommends that he takes advantage while living with his parents to save as much as possible.

For a free financial check-up, write to Wealth Check, The Independent, 2 Derry Street, London W8 5HF; or email wealthcheck@independent.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Operations Manager

    £30000 - £38000 per annum: Recruitment Genius: They are a financial services c...

    Guru Careers: Stockbroker

    £Basic (OTE) + Uncapped Commission: Guru Careers: A Stockbroker (qualified / p...

    Recruitment Genius: Financial Adviser

    £20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

    SThree: Graduate Recruitment Resourcer

    £20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

    Day In a Page

    Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

    The acceptable face of the Emirates

    Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk
    Nepal earthquake: One man's desperate escape from Everest base camp after the disaster

    Escape from Everest base camp

    Nick Talbot was sitting in his tent when the tsunami of snow and rock hit. He was lucky to live, unlike his climbing partner just feet away...
    Adopting high fibre diet could dramatically cut risk of bowel cancer, says study

    What happened when 20 Americans swapped diets with 20 Africans?

    Innovative study in the US produces remarkable results
    Blake Lively and 'The Age of Adaline': Gossip Girl comes
of age

    Gossip girl comes of age

    Blake Lively is best known for playing an affluent teenager. Her role as a woman who is trapped forever at 29 is a greater challenge
    Goat cuisine: Kid meat is coming to Ocado

    Goat cuisine

    It's loved by chefs, ethical, low in fat and delicious. So, will kid meat give lamb a run for its money?
    14 best coat hooks

    Hang on: 14 best coat hooks

    Set the tone for the rest of your house with a stylish and functional coat rack in the hallway
    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?