Should I Pay off My Student Loan Early?
‘Should I pay off my student loan early?’ This is a question that has passed the lips of pretty much every graduate. Most of us are not sure of the pros and cons of paying back our loans early. It all hinges on when you studied and how much you earn.
The cost of university has risen over recent years, as has the size of the loan that most students have to take out to pay for it. In this article, we’ll outline the pros and cons of paying back your student loan early and how it could impact your finances.
How much is my current student loan repayment?
The amount you’re currently paying, and will be paying in the future, depends on how much you earn. Irrespective of when you started at university, you will pay 9% of the total amount you earn over the set threshold (detailed below).
What repayment plan am I on? And when will I start making repayments?
What you pay depends on which repayment plan you are on. At the earliest, repayments will start the following April after you finish your course, but you will only start making repayments when you earn over the income threshold.
Plan 1 (started an undergraduate university course before 1st September 2012)
- You start repaying your loan once you earn more than £19,380 annually, £1,615 a month or £372 a week
- You will repay 9% of everything you earn over this threshold
Plan 2 (Started an undergraduate university course after 1st September 2012)
- You begin to repay when you earn over £26,575 a year, £2,214 a month or £511 a week
- You repay 9% of your income over this threshold
As with your tax and National Insurance payments, your student loan repayments are deducted from your salary before they even reach your current account.
Can I pay back my student loan early?
Whether it is a good idea to repay your loan early depends on how much you earn, if you have any other debts, and your overall financial situation.
For most people, their financial situation leaving university means it’s easier to simply repay the loan as usual each month, rather than making extra repayments to pay it off early.
The government estimates that only 25% of current undergraduates who take out loans will repay their student debt in total before it is written off. As a result, there is a chance that if you make extra repayments, you could lose this money unnecessarily as you might never have made these repayments based on your salary.
Unlike other forms of debt, student loans don’t affect your credit score, so you don’t need to worry about trying to pay it off to appear responsible to potential creditors, or in an attempt to boost your credit rating.
However, in some cases it may be advantageous to repay your student loan early.
For high earners without any other debts, repaying your student loan early could be a good idea, as long as you have the funds you need to live comfortably and you won’t miss the money.
Before deciding whether to repay your loan early, you should work out what you’re earning and how your salary might grow over the next 10, 20, and 30 years. This means you can determine if you are realistically ever going to pay off your student debt and whether it is worth paying it off early.
If you conclude that it is unlikely you will ever completely repay your loan, then your money might be put to better use elsewhere.
But if your salary is predicted to reach a level that means you will repay your loan in full, and you don’t have any more pressing financial commitments or debts to pay, it might be worth repaying your student loan early to avoid extra interest from accruing.
Student loans, unlike some personal loans do not have early repayment fees, so you don’t need to account for these when working out whether it is financially prudent to pay back your loan early.
When will my student debt be written off?
All student loans are written off at some point.
Plan 1 – your loan will be written off when you reach 65 if you took it out before the 2005/6 academic year. If you took out your loan in or after the 2006/7 academic year, your loan repayments will be cancelled 25 years after the April you were due to start repayments.
Plan 2 – If you took your loan out after September 1st 2012, it will be written off 30 years after the April that you were due to begin repayments.
What other circumstances would stop or wipe my loan repayments?
- If you stop working or your income goes under the repayment threshold
- If you become unfit to work at any point or pass away your debt will be wiped out
Should I pay off my student debt or save for a mortgage?
If you are at the stage of life where you are thinking about buying a home of your own, it could make more sense to save for a mortgage than paying off your student loan.
Because a bigger deposit can help you to get a more affordable mortgage, it makes more financial sense to concentrate on building up your mortgage deposit rather than overpaying your student loan.
Read our guide on how to save for a mortgage deposit for more information.
Mortgage lenders will take your student loan into account when deciding on how much to lend, as repayments will come out of your salary and reduce your monthly income.
However, although your payments will be considered alongside your other outgoings and can affect the size of the mortgage you can get, as long as you can comfortably afford both repayments along with other commitments then this should not cause an issue.
The size of your deposit and the overall state of your finances will be of greater significance to the lender and have a greater impact on the outcome of your mortgage application.
You might want to consider paying off your student loan before applying for a mortgage if you are a high-earner who has almost paid off your student loan in full. If you’ve got a good deposit saved already, then clearing your student loan might mean you can get a slightly larger mortgage as, without the student loan repayments, your regular monthly outgoings will be reduced.
Should I pay back my student loan early or pay off other debts?
Student loans are one of the most affordable and manageable forms of debt because you only pay them back once you earn a certain amount. You also won’t be chased for repayments, unlike other forms of credit like loans, mortgages, or credit cards that you are expected to repay regardless of your current income.
So, if you have outstanding debt, especially high-cost debt, it would be better to focus on clearing this before thinking about making extra repayments on your student loan.
Should I pay off my student loan or save?
Whatever your circumstances, it pays to have savings to call upon should you be confronted with an emergency or financial difficulties in the future. You may choose to build up your savings pot or start an emergency fund, and both of these would normally take priority over paying off your student loan, depending on your circumstances.
If you are unlikely to pay off your loan in full before it’s written off, it could be wiser to concentrate on building up your savings so you have a financial cushion to deal with whatever life may throw at you.
Remember that if you make an extra student loan repayment, you won’t be able to get this money back which could cause problems if you find yourself needing money in the future.
For example, if you put spare cash towards repaying your loan rather than your savings, you could end up short of money. You might be forced to take out more expensive forms of credit in the future, which would reverse any benefits you may have got from repaying your student loan early.
Should I pay off my student debt or pay into my pension?
Whether you should pay off your student loan which helped you shape your career, or pay into your pension which will cover your living expenses when you no longer work, depends on how likely you are to pay off your loan before it is written off.
In most cases, paying into a pension would be better for your finances than paying off your student debt.
When you pay into a workplace pension scheme, your employer will make contributions and you will also receive tax relief which will boost your pension funds.
Although there are risks associated with pension investments, it is wise to consider starting to prepare your finances for later life rather than paying off your student loan, especially as many people won’t clear this debt anyway.
If you make extra repayments towards your student loan when your salary means you are unlikely to ever pay it off, then you will be spending money which otherwise you wouldn’t have needed to spend. It would mean you have less money to put towards your pension which could cost you in retirement.
So, instead of making overpayments on your student loan, this money could be used to boost your savings or to make contributions to your pension which can help you financially in the long-term.
It all depends on your circumstances
To reiterate, paying off your student loan is not always a financially savvy idea for many with student debt. It all comes down to how much you earn, the amount you contribute each month to repayments, and the level of interest your loan is building.
Plan 1 loans (anyone who started university before September 2012) have an interest rate of 1.1%, meaning other interest-earning debts are likely to be more expensive than student debt.
Plan 2 loans have an interest rate of 5.6% while a student is studying. This is made up of the Retail Price Index (RPI), which is currently 2.6%, plus 3%. After you complete your studies, the rate is set by your earnings.
- Earn £26,575 or less - the interest rate is RPI (currently 2.6%)
- Earn £26,576 to £47,835 - the interest rate is the RPI (2.6%) plus up to 3%
- Earn more than £47,835 - the interest rate is the RPI (2.6%) plus 3%
So, always factor in your salary and the interest rate applied to your loan before deciding whether you should pay off your student loan early, or concentrate on saving.
How to repay student loans early?
You can pay additional sums to your regular monthly student loan repayment online on the Student Loans Company website.
This article is written as an informational guide and does not constitute as advice. Financial decisions must always be carefully considered against individual personal circumstances.
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more