Should I pay off my student loan early?

Should I consider paying off my student debt early?

The answer is almost certainly not. Usually when it comes to debt, overpaying to clear what you owe and paying less interest makes good financial sense. But student loans are one of the few areas where it may not be in your best interests to pay extra.

This is because most people never clear their loans in full before the government wipes the debt. The government clears your loan including any interest left unpaid either 25 or 30 years after you start paying or when you turn 65. How long you pay depends on which student loan plan you’re on.

Since the vast majority of people don’t clear their loan before that deadline, voluntarily paying extra cash won’t either mean you pay less or clear the loan sooner - it’s just wasted money.

Lots of people panic about £50,000 debts and rising interest rates, but actually these are mostly irrelevant. If you were never going to clear the loan in 30 years anyway, then all the extra interest is just more money that gets wiped by the government at the end. Student loans don’t go on your credit file either, so it’s not treated as a debt in the traditional sense when you’re trying to borrow from lenders.

It makes far more sense to try and think about student loans as a tax. Irrespective of how much you borrow or how much interest is charged, you are charged a flat rate when you start earning. If you have a Plan 2 loan, you’ll have to pay 9% your salary above £27,288. If you earn less than this, that means you won’t pay anything at all. If you’re on Plan 1, the threshold is £19,884.

The average (median) salary in the UK was £29,900 in 2020. Someone earning that much would pay £235.08 a year or £19.59 a month on Plan 2. Assuming you graduated and immediately earned the median salary (and didn’t get any pay rises either) – over your lifetime you’d pay back just £7,052.40 – nowhere near the amount you borrowed.

If you never earned over £27,288 you wouldn’t have to pay back a single penny of the loan. The debt is also cleared if you die, so it can’t be passed onto your children or beneficiaries.

You’d need to start working on a salary of about £55,000 and expect to earn well over £100,000 within 30 years to pay off your loan at current rates.

That means the only people who should overpay on their student loans are super high earners who are likely to clear their loans before they’re wiped. If that’s you, you should definitely consider overpaying since the longer the debt is running, the more interest you’ll pay, and the interest isn’t cheap.

Those figures are based on borrowing £9,250 for fees and £8,944 living costs per year, which works out at £54,582 in total. If you borrowed substantially less than that, for instance because you lived at home, then you may want to consider early repayments as you will be more likely to pay off the full amount with interest within 30 years.

You can find out how much you owe on the Student Loans Company website. Look at your payslips and see how much you’re paying each month. Multiply that by the number of months you have left before the debt is cleared to get a sense of whether you’ll pay your full loan off. Think about your salary expectations and whether your income will rise sharply. If you think you’re going to be a high earner, extra early repayments are worth considering.

Student Loans Company website

How much do you repay?

Plan 1 - if you started uni before 1st September 2012

• You will start repaying your student loan from the April after you finish your course - once you start a job that earns over the threshold

• If you earn more than £19,884 – that’s £382 a week or £1,657 a month – 9% of what you earn above this will go towards paying off your student loan (around £34 per week or £149 per month)

• This threshold changes in April of each year, usually going up (meaning you can earn more before you pay, and the charge applies to less of your earnings)

• Your repayments will be automatically deducted from your pay if you work for an employer

• The debt is cleared at 65 if you took the loan before 2006, or 25 years after you started paying if you took the loan after that.

Plan 2 - if you started uni after 1st September 2012

• You start paying the loan back the April four years after the start of your course, or the April after you finish or leave your course

• You will begin to pay your loan when you earn£27,288 a year - that's £2,274 a month or £524 a week. Your repayments will be automatically deducted from your pay if you work for an employer

• If you earn more than £27,288, then 9% of what you earn above this will go towards paying off your student loan

• The debt is cleared 25 years after you first started paying.

What interest will you pay?

Remember that most people don’t pay any interest at all. Interest is added before the government clears the debt, but that makes no difference if you won’t ever pay back the full amount you borrowed.

The student loan interest rate for plan 1 is 1.1%, so any other interest-earning debts you have are likely to cost more than your student loan.

For those on plan 2, interest is 4.1% while you're studying. This is made up of the Retail Price Index plus up to 3%, so it can change from year to year. After you have finished your course, your interest is based on your income:

• If you earn £27,288 or less, you pay interest at the rate of inflation (currently 1.5%)

• If you earn £25,000 to £49,130, you pay RPI inflation plus up to 3%

• If you earn more than £45,000, you pay inflation plus 3%

Find a full list of interest rates on the Student Loan Repayment website

What if you have other debts?

If you have outstanding debts in addition to your student loan, it is almost certainly worth prioritising these instead of overpaying on your student loan. These debts could include:

• An outstanding credit card balance

• An overdraft that is not interest-free

• A loan with a higher interest rate than your student loan

As student loan repayments come out of your salary and you only have to make them if you earn above the earning thresholds, there is no chance of falling behind on them and getting into financial trouble like you could with other debts.

If your student loan is your highest interest debt and you think you’ll clear it before it’s wiped, then you might consider paying it back before other sums you owe.

What if you have no other debts?

If your student loan is your only outstanding debt and you have some cash to spare, you could consider repaying it, but again only if you will clear the full amount before it is wiped out.

For most people, putting the extra cash into a high interest interest savings account , a pension, or a stocks and shares ISA is a more sensible use of your disposable income. If you’re not paying interest on your student loan because you won’t clear it, using the money to make extra returns is a far more sensible course of action.

You could use what you save up to:

• Use as a deposit for buying a house

• Buy a new car without needing a costly loan

• Put towards your retirement

• Invest for the future

• Have a rainy day fund for emergencies

Compare savings accounts

How do you make overpayments?

You can make overpayments on your loan in the following ways:

• Pay an additional amount online to the Student Loans Company with a credit or debit card. A minimum of £5 applies.

• Send a cheque or postal order to the Student Loans Company, making sure to write your Student Support Number on the back.

• Set up a direct debit or standing order by contacting a Student Loans Company adviser.

No refunds of your overpayments can be made if you change your mind, so make sure you are able to manage without the funds you send.

Student Loans Company

Will your debt ever be wiped?

All student loan debts will be wiped at some point later in your life if you do not break their terms and conditions:

• Plan 1 - If you took out the loan before the 2005/06 academic year, your loan will be wiped when you reach 65.

• Plan 1 - if you took out your loan in or after the academic year 2006/07 it will be cancelled 25 years after you became eligible to pay it.

• Plan 2 - if you took out your loan after the 1st September 2012 debt will usually be written off 30 years after you became eligible to pay it back.

• In Scotland, your loan will be cancelled when you reach 65 if it was taken out in 2006/2007 or before; if it was taken out in 2007/2008 or after, it will be 35 years after you started to repay it.

• All student debts will be unequivocally wiped upon death or if you become permanently unfit to work