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Why starting to pay off a student loan early helps
Reducing the capital balance and interest owed on your loan saves you money.
A student loan can help you afford to study a degree or diploma course at a university or college, and if you’re working full-time while studying part-time, you could qualify for one on your own. However, if you want to study full-time but don’t have a guaranteed income, you need a guarantor – perhaps a parent or a close relative – to sign surety on your student loan. This means that they will be responsible for payments while you are studying and until you can take over payments after your studies. Note, however, that signing as your guarantor also means that they will be responsible for repaying the debt if you do not.
What makes a full-time student loan different from most other types of loan is that you do not have to start paying back the capital amount borrowed while you are studying. Over that period, you or your guarantor will pay only the monthly interest. When you graduate and get a job, you will begin paying a larger instalment every month, with a portion of the capital balance added to the interest, until the amount borrowed has been paid off in full.
For full-time students, Nedbank offers a variable interest rate that is linked to your academic performance – the better your marks, the lower your interest rate. You could be getting rates as low as prime plus 2%, which is much lower than the rate on most personal loans. So, you can already make your student loan cost less simply by working hard – but how else can you save on a student loan?
Can you afford to pay more?
Paying only the interest on your student loan every month until you’re an employed graduate is undoubtedly a convenient feature, but what if you (or your guarantor) have a bit more money to spare? Can you begin paying more than the minimum amount every month from the moment you start studying?
Being a full-time student doesn’t mean you can’t run a side hustle or get a part-time job, and any income you can use to start paying off your debt early will reap rewards. Do some basic maths, and you might be surprised by how much you can save on the cost of a student loan.
A hypothetical example
Say you take out a student loan for R80,000* at an annual interest rate of 10.5% over 7 years. For 4 years (48 months) while you are studying, you pay only the monthly interest on the R80,000 balance – around R700* a month. For the remaining 3 years, your payments will be closer to R3,000* a month, as you pay off the capital as well as interest.
Extra payments on a student loan can reduce your capital balance faster
But what happens if you can pay, say, R1,000* a month from the moment you start studying? The extra R300* a month will start reducing the capital balance owed – it will be closer to R79,700* after the first month, R79,400* after the second month, and so on. (In fact, the drop in your capital balance will start to accelerate, because every time you reduce it, the next interest payment should also be lower – so more of your R1,000* payment goes towards reducing the balance, not to interest.)
Using this example, in 4 years when you graduate and find a job, you could have reduced the capital amount you still owe to R66,600* or less. Over the next 3 years, you could settle the debt in full by making monthly payments of roughly R2,400*.
The difference is significant: in our first example, paying only the interest while you study, the loan is going to cost you roughly R141,600* in total. If you can pay just R300* more a month on an R80,000* loan, it will end up costing less than R134,400*.
If you can afford to pay more than R300* extra every month, your savings will increase. In our example, a monthly payment of R1,500* from the start of your loan could leave you with a capital balance below R41,600* after 4 years – paying that off over 3 years at about R1,520* a month, it would cost around R126,720* in total. That’s a saving of nearly R15,000*.
*Note: These figures are hypothetical examples used for illustrative purposes only. They do not consider the effects of initiation fees and other bank charges, or fluctuations in interest rates – these will vary according to individual circumstances. Their sole function is to make clear how extra payments on a student loan can reduce your capital balance faster.
Explore your student loan options
Nedbank offers student loans of up to R400,000 over 7 years at competitive interest rates linked to academic performance.
