Tips and Tactics for Repaying Student Loans
There are two main types of loan, and you repay yours only when you stop studying and only when you earn above a certain salary threshold.
We are taught that repaying our debts as soon as we can makes good financial sense. This is particularly important if you are paying high interest rates, such as on credit cards, overdrafts or payday loans. Even with mortgages we might want to get rid of that debt as soon as we can.
Money you’ve borrowed from the Student Loans Company to fund university, however, is different. Student loan repayments are based on your income: you pay only when you earn above a certain threshold and only when you have sufficient earnings to meet them.
In a quirk of the system, it means that repaying student debts too quickly could actually cost you money. This means it is vital to understand whether or not it makes sense for you to pay up earlier than you need to.
Here are some tips on how to manage your student loan repayments.
Do I need to budget for student loan repayments?
Student loan repayments come directly out of your salary, like tax and national insurance, reducing how much money lands in your bank account. This means that you’ll 'earn' less for the duration of repaying your loan, but you don’t need to remember to set money aside for repayments because your employer does the budgeting for you.
The exception is if you’re self-employed and you usually budget for self-assessment tax repayments. In addition to putting money aside throughout the year to cover your income tax and national insurance, you’ll need to put away enough money to cover student loan repayments, so you don’t find yourself short when the time comes to pay your bill.
Can I pause student loan repayments?
No, you are expected to repay 9% of any of your earnings above the threshold (6% if you are repaying a postgraduate loan) as soon as you earn at least as much as the threshold to stay repaying. If your earnings were to drop, however, or you became too ill to work, you automatically pay less. Repayments will be stopped until you earn over the threshold once more. If you never do, you’ll never have to restart payments.
Am I likely to repay my loan in full?
This depends on the type of student loan you have: plan one or plan two.
You are less likely to repay in full if you have a plan two loan. In fact, estimates suggest that of those students going to university now, only 17% will end up fully repaying their loan. That is because plan two student loans are wiped 30 years after graduation.
Given so many of these loans are very large (plan two loans came in as tuition fees in England rose to over £9,000), and considering you repay only 9% of what you earn over the threshold, you'd need to earn a well-above-average salary for a long time to clear the whole thing within 30 years.
Plan one loans are different; they tend to be smaller and with lower interest rates. For some students they are written off at a later point than plan two, when you are over 65 if you went to university before 2005/06 in England, Wales or Northern Ireland. If you went to university between then and 2012, they are written off from 25 years after the April you were first due to repay.
Students in Scotland who went to university before 2007 have until they’re 65, or 30 years, whichever is sooner. Those after 2007 have 30 years after the first April you were due to repay. Because these loans tend to be smaller than plan two loans, however, more people will repay them in full during this time.
Can I pay my student loan off early?
Yes. There are no early repayment fees. Be aware, however, that anything you overpay cannot be refunded (say, if you suddenly faced an emergency and needed cash).
Repaying is not always the best idea. The government suggests that those who choose to overpay discuss their decision with a financial adviser.
Should I overpay my plan one loan?
Borrowers with plan one loans are more likely to repay them in full, and they are not interest-free, which means that repaying them more quickly should save you money. But the interest rate is very low for this type of loan, in line with inflation. The terms are also generous in that if you have any time out from earning, repayments will stop.
You might find that money you are considering for overpayment could be better spent towards buying a property, investing or increasing pension contributions. Certainly it makes financial sense to use it first to clear debts that have higher rates.
Should I overpay my plan two loan?
Plan two loans are written off after 30 years. The threshold for repaying them is also higher than for plan one loans, and you only ever have to pay 9% (6% on a postgraduate loan) of whatever you earn over the threshold. That means many people will not repay all of what they owe, and some low-earning graduates will never repay a penny.
Those who earn the most will repay the most, and they are more likely to therefore clear their outstanding loan during the 30-year period.
If you are guaranteed to repay your loan in full within 30 years, it makes sense (if you can afford it) to do so as quickly as possible, because these loans come with a higher interest rate. The longer it takes you to repay, the more interest will grow on your outstanding balance.
You need to proceed with caution, however. Can you really guarantee that you will repay your loan in full? What happens if you fall ill and are no longer able to work, or you decide to take a career break, or you change jobs to one with a much lower salary? If you clear your loan early, or pay a chunk of it off, and then your income drops, this money could be wasted because you might never have ended up owing it.
Also remember that, even with a 5.6% interest rate, your plan two student loan will still be one of the cheapest ways you can borrow such large sums, with repayment terms based on your earnings — terms you’ll never receive on a mortgage or a bank loan.
Will my student loan affect my credit score?
Your student loan does not appear on your credit score, and having a big outstanding student loan debt will not impact how lenders view you. Similarly, paying it off early will not improve your credit file, unlike if you were to pay down outstanding bank or payday lender debt. The only way it affects how you can borrow is that it reduces your income, diminishing how much you will be seen to be able to borrow with a mortgage.
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Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more