‘I have a £10k house deposit. Should I pay off my £45k student loan first?’

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Imogen Cromack faces a dilemma typical for her generation.

The 26-year-old, who works in communications in London, would like to buy a house with her partner before she turns 30.

She has around £10,000 saved in cash, which she has put away in a two-year fixed-rate savings account, where it will earn decent guaranteed returns.

However, she’s also saddled with £45,000 student loan debt, having completed a three-year business course at the University of the West of England.

Repayments are taken from her salary each month, at 9pc on anything earned over the Plan 2 threshold of £28,470. Thanks to the interest charged, for many graduates, the prospect of never paying off a student loan is all too real.

She asks: “My main question, really, is: should I look at paying off my student loan faster, or should I save instead for a deposit and other house buying expenses?”

Ms Cromack spends less than £2,000 a year on holidays, choosing to go on one “big” holiday a year, usually lasting a week.

She pays £1,000 a month in rent and bills, and prioritises a £80-a-month gym membership, which she gets heavily discounted through work.

She says: “I don’t frequently go out for big expensive dinners. I probably spend more on just seeing my friends and doing some activities and stuff like that. I am more of a homebody personally.”

As she looks towards the next five years, Cromack says her priority is to be financially stable, adding: “I would like to be prepped to be able to stand on my own two feet.”

Lucie Spencer, financial planning partner at Evelyn Partners, said:

Ms Cromack lives a relatively conservative lifestyle in terms of expenditure, so it is sensible to consider the implications of paying off her student loan early versus saving to buy her first home.

What she must remember is that student loan repayments can affect the size of the mortgage she can secure, though it won’t have as heavy an impact as other personal debts.

While student loans do not appear on a credit file, and therefore won’t affect her credit rating, they can impact her affordability level, as the student loan repayment counts as a regular outgoing in the same way her gym membership does.

However, in contrast with other debts, it is the amount which you repay which gets factored into this assessment rather than the total outstanding debt.

In essence, the student loan system works more like a graduate tax on earnings than a conventional loan. Like income tax, the more you earn the more you pay, so it is the higher earners that will end up paying the most.

But, while Ms Cromack qualifies for repayments and may want to consider repaying her debt earlier, the savings she has now won’t be enough to clear her outstanding liabilities, and she will continue to repay the same amount each month.

If she chooses to take time out from her career at any point, perhaps to raise a family or take a sabbatical, her repayments will stop for that period.

The current interest rate on a Plan 2 student loan is relatively high at 7.3pc, as of September 2024, but this typically resets every September and is linked back to the RPI of the previous March, so it should lower later this year.

With that in mind, it may make more sense for Ms Cromack to prioritise short-term financial priorities such as raising a deposit to buy a home rather than clearing her student debt.

If she wants to focus on building up a deposit, then she could consider a lifetime Isa (Lisa), where she will attract not only interest on her savings, but also an additional 25pc top-up from the Government of up to £1,000 on the maximum annual contribution of £4,000.

Savings rates are in retreat mode, and it is important to keep savings as tax efficient as possible – something a Lisa can offer.

A Lisa pot can be invested in stocks and shares or held in cash, but if Ms Cromack plans to purchase a home within the next five years, it may be better to stick with a cash option to ensure she is not impacted by any stock market fluctuations.

Darius McDermott, managing director at Chelsea Financial Services, said:

It’s great to see someone in their 20s balancing both ambition and financial discipline. The desire to save for a home while also thinking about clearing debt is admirable, but it’s important to be realistic and strategic with priorities.

With £10,000 already saved in a two-year fixed-rate account, the foundation for a house deposit is in place.

However, the student loan repayment at 9pc is a significant cost. Put simply, if the interest on the loan is higher than the return on your savings, it often makes financial sense to prioritise debt repayment, especially with high inflation eroding savings in real terms.

That said, student loans are unlike other forms of debt – repayment is tied to income and is eventually written off. So rather than rushing to pay it off entirely, a balanced approach might be wiser, continuing to save steadily, while ensuring you’re not accruing more expensive interest than necessary.

As Ms Cromack’s income grows, gradually increasing contributions to savings, and eventually exploring investment options, could help build momentum towards her long-term goals. She’s already made a strong start with her fixed-rate savings.