DebtLoansPersonal Finance

Should I Repay My Student Loan Early?

Degree ceremony. Degree student wearing cap and gown

In the UK, students can get a generous loan package from the government – money to pay your fees and at least some of your living costs while you’re away from home for the first time.

While it’s nice not to worry about money when you’re focused on studies and student shenanigans, eventually you’re going to take off that graduation gown and realise there’s a pretty hefty debt waiting to be repaid.

Typically, the amount that you pay is based on how much you earn. Student loan repayments are taken directly from your paycheque each month if you’re earning more than the income threshold. Then, after 25-30 years (depending on the year you graduated), the government will write off the loan entirely, meaning that any debt you haven’t managed to pay off is cancelled.

This means that, in most cases, paying off your loan early doesn’t make much sense. Average earners will never have to repay the full amount – so you’re not gaining anything by making additional repayments. Spare money that you’re considering putting towards your student loan may be better used saving for a house deposit, an emergency fund or even set aside in a stocks and shares investment account.

Also consider the fact that your repayments would pause if you lost your job or had a salary decrease that took you below the repayment threshold. You shouldn’t have to worry about a student loan hanging over your head

Understanding student loan interest

One thing that tends to worry people about student loan debt is the rate of interest. Since the government charge interest on the balance, your total debt will go up each year if you’re not making payments. It can be disheartening to look at your annual statement and see that your loan is increasing, or that the payments you’re making aren’t enough to shift the balance.

In reality, though, the amount of interest you’re charged isn’t really going to affect how much you pay. You’ll continue to pay the set amount as determined by your income, until the time at which the loan gets cancelled. While it doesn’t feel great to know that you have that debt, it isn’t going to affect your life – or your finances.

High earners who graduated after 2012

The only people who should really consider making early repayments are those on a ‘plan 2’ loan and a particularly high income. If you earn consistently high amounts after graduating – we’re talking £40,000 as a starting salary and substantial pay rises throughout your career – then you will probably end up paying off the whole student loan balance before its written off.

In that case, paying it off early makes sense because it will allow you to avoid building up additional interest. Essentially, if you’re likely to pay off the whole loan plus interest during your working life, then making additional repayments could save you money. For those on a ‘plan 1’ loan, this is unlikely as the interest rate is a lot lower.

Still unsure about you best option? The Money Saving Expert student loan repayment calculator can help you make a final decision.

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