Student Loans – Better Off Left A-Loan? No!

Gregory Penfold of Humphrey & Co, Chartered Accountants, who are members of the Association of Specialist Providers to Dentists (ASPD). Gregory lectures extensively to VDP groups and other dentists on accountancy and taxation matters.

ASPD members offer professional, objective and practical advice and services, based on experience within the industry, to dental practices and other businesses within the dental sector. ASPD members include solicitors, accountants, banks, financial advisers, valuers and sales agencies, insurance brokers and leasing and finance companies.

It is common for dentists to leave years of education having accrued significant, sometimes crippling debts. Whether in the form of a student loan, professional development loan or even credit cards a dentist’s debt can mean the first few years of their working lives are spent repaying the debts which helped to get them their qualifications.

Looking at the cost of your borrowing and the interest rate charged on your loans is an important part managing your finances and could lead to significant savings over time if done properly. Business borrowing, for example a practice loan or finance for equipment, is generally tax efficient. Conversely personal borrowing is not so efficient from a tax point of view. Discussed here are student loan debts as the vast majority of dental graduates will have one. A brief history lesson first.

The Student Loans Company (SLC) is a UK public sector organisation and was established to provide financial services (loans and grants) to over one million college and university students each year. The student loans scheme was introduced by the Education (Student Loans) Act 1990 and the Education (Student Loans) (Northern Ireland) Order 1990.

The SLC administers government-funded loans and grants and it is designated a Non-Departmental Public Body (NDPB).

Dentists who began university on or after September 1998 and who have ‘income contingent student loans’ begin to repay these when their income reaches the threshold of £15,000 per annum. Employed dentists with these types of student loan should have the repayments deducted from their salary each month. The self employed must repay a proportion of their loans each January with their annual tax payment. HM Revenue & Customs then pay the student loan element over to the SLC.

How much each dentist will repay will depend on the amount of the loan and the interest rate charged. The SLC’s interest rate is linked to the rate of inflation and is adjusted each year in line with the Retail Prices Index (RPI).

As readers will appreciate the cost of finance is the interest that is charged on the loan. In recent years the student loan debt has been one of the cheapest forms of finance available with rates as low as 1.3% (2002/2003). However in early September, at the beginning of the 2007/2008 academic year, it came as a shock to most when the Student Loan Company increased the APR (annual percentage rate) from 2.4% to 4.8%. Yes, it doubled!

How and why it jumped by such a margin is puzzling, some speculate that the rate had to increase to keep up with inflation and in keeping with the SLC’s policy. However the rate of inflation is presently just 2.1% so others speculate that the government may be planning to sell the ‘book’ of student loan debt to an outside company. Whatever the reason the bottom line is that it does have an adverse effect on dentists, in particular those who are self employed.

By way of an example let’s take a dentist that has a £20k student loan debt and is liable to repay this loan with their tax payment every January. One day they happen to come into some money, let’s say £20k on a lottery scratch card. Previous advice was to put that windfall in a savings account earning 6% interest (3.6% after a 40% tax deduction). The student loan would only be charging 2.4% interest so in a year the dentist would be better off financially by putting the £20k in a bank account and not repaying their loan early.

In one year the dentist would earn more on that £20k windfall in the bank than the student loan company would charge in interest, the dentist would be £254 better off.

However now that the student loan rate has doubled this advice no longer applies. If the dentist did leave the £20k windfall in the bank earning 6% (3.6% after a 40% tax deduction) they would actually be worse off by £241, a difference of nearly £500.

It follows therefore that where possible you should repay your student loan sooner rather than later.

However, before going to the bank and drawing out your savings to repay your student loans, wait a moment, there are of course exceptions. Your most expensive personal borrowing, in terms of the interest rate should be repaid first. This will include store cards, credit cards and personal loans. In the vast majority of cases these forms of debt will always charge a higher rate of interest. Once these have been repaid then the student loan should be next.

The student loans company has a useful website at www.slc.co.uk containing details of their remit and financial data.

Contact Greg Penfold on 01323 730631 or gpenfold@humph.co.uk


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