Should I pay off my student loan early?

Thursday 10 January 2019, Money


Should I pay off my student loan early?
While your student loan is likely to be one of the cheapest loans you will ever get, it can also be a burden you may want to clear as soon as possible. We weigh up if it is worth paying off your student loan early.

Why pay off your student loan early?

Student loans of a sizeable amount will take years to pay off – especially when you factor in interest accruing on the amount you owe.
Repaying it early will speed up the process so that you have one less debt to worry about. It will also mean you end up paying less interest in the long-run.
This might be especially attractive if you have had the debt for a while or just want to rid yourself of as much debt as possible.
As student loans do not come with penalties for early repayment, there is no harm in clearing the debt early.
You can find out how much you owe on the 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.
  • If you earn more than £17,335, 9% of what you earn above this will go towards paying off your student loan.
  • This threshold will rise to £17,495 in April 2016.
  • Your repayments will be automatically deducted from your pay if you work for an employer.
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/if your salary is £21,000 a year, or £1,750 a month, or £404 a week.
  • Your repayments will be automatically deducted from your pay if you work for an employer.
  • If you earn more than £21,000, 9% of what you earn above this will go towards paying off your student loan.
What if you have other debts?

Student loan interest rates for plan 1 currently stand at 0.9% for those who started university after 1998 (2.5% for pre-1998 starters) so any other interest-earning debts you have are likely to cost more than your student loan.

For those on plan 2, if you are coming into repayment from April 2016 the rate is variable depending on income, with 0.9% RPI for incomes of £21,000 and under, rising up to RPI+3% (3.9%) where income is £41,000 or more.

If you have outstanding debts in addition to your student loan, it could be 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 £17,335 threshold for plan 1, and the £21,000 threshold for plan 2, there is no chance of falling behind on them and getting into the financial trouble you could with other loan types.

What if you have no other debts?

If your student loan is your only outstanding debt and you have some cash to spare, making overpayments on your loan to clear it more quickly may be the sensible thing to do.

However, a student loan is probably the cheapest long-term debt you will ever have. Before you plough all of your disposable income into clearing your loan, you could consider putting the money instead into a high interest savings account.

Funds in a savings account could earn more interest than your loan is costing you, at a time when student loan interest rates are so low.

You could use what you save up to:
  • pay off your student loan in one go
  • use as a deposit for buying a house
  • buy a new car without needing a costly loan
Compare savings accounts

How do you make overpayments?

If you have no other ongoing debts, have cash to spare, and would rather say goodbye to your student loan debt than put the money in savings, you can make overpayments on your loan in the following ways:
  1. Pay an additional amount online to the Student Loans Company with a credit or debit card. A minimum of £5 applies, and you will be charged 1.5% extra if you pay by credit card.
  2. Send a cheque or postal order to the Student Loans Company, making sure to write your Student Support Number on the back.
  3. 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.

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:
  • If you took out the loan before the 2005/06 academic year, your loan will be wiped when you reach 65.
  • 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.
  • 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 2007/08 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.