Should you pay off student loans early?

Can you pay off student loans early?

Yes, if you’d like to free yourself from student debt, you can pay off your student loans early. However, just because you can pay off your student loan early doesn’t mean you should. 

There are significant differences between student debt and other types of borrowing such as mortgages, credit cards and personal loans which impacts when you pay back your loan. These include:

• Your student loan repayments are paused if your income falls below the threshold
• Your student loan won’t affect your credit score
• You’ll only ever repay 9% of your salary, regardless of how much you owe
• Your monthly repayments won’t increase, even if interest rates do
• Your outstanding student debt will be wiped after a certain period of time

This can mean that sometimes paying your student loan back over time makes more sense than paying it back in a lump sum.

Psst! Skip to the pros and cons section to learn more about these differences.

How do UK student loans work?

How your student loan works depends on which repayment plan you’ve got and when you’ll start repaying the money. There are two most common types of student loan: Plan 1 and Plan 2 loans. Regardless of whether you have a Plan 1 or Plan 2 loan, your repayments will be deducted from your salary before they reach your current account. Because of this, some people choose to think of student loans as a type of tax, rather than a debt. 

Plan 1 - You started an undergraduate university course before 1st September 2012

If you have a Plan 1 loan, you’ll start repaying your loan once you earn more than £22,015 a year and you’ll repay 9% of your income over this threshold. So if you earn £25,000 a year, you’ll epay £268 a year. If you earn £30,000, it’s £718.65.

With a Plan 1 loan, your interest rate will be the lower of the following two options:

• The Bank of England base rate + 1%
• The rate of inflation. The rate is fixed on the 1st September each year and is based on the Retail Prices Index (RPI) from the previous March.

Plan 2 - You started an undergraduate university course after 1st September 2012

If you have a Plan 2 loan, you’ll start repaying your loan once you earn over £27,295 a year and you'll repay 9% of your income over this threshold. So if you have a salary of £28,000, you’ll repay just £63.45 a year. If you earn £35,000, you’ll repay £693.45. 

Usually, your interest rate will increase in line with the Retail Prices Index (RPI) and something known as the ‘Prevailing Market Rate’ cap. But since the RPI is currently high due to rising inflation, the Government temporarily capped the interest rate for students and graduates at 7.1%.

Is it better to pay off student loans early?

For some people, paying off their student loans early can be better than keeping the money in savings. For most people, though, it’s better to save the money, invest it, or use it to pay off other debts.

This may seem to contradict traditional financial advice. After all, when we consider other types of borrowing, if you’re paying a higher interest rate on your debt than you can earn in savings, it often makes sense to use your savings to pay down debt.

However, as we mentioned earlier, student debt isn’t like other types of debt. Not only does it not damage your credit rating, but there are protections in place to protect low earning graduates. Plus, rising interest rates don’t affect the affordability of the loan (since the percentage you’ll repay will remain the same). 

Whether it’s better to pay off your student loans early or pay the minimum amount each month will depend on the type of student loan plan you have, your individual financial situation and your life goals.

No matter what your situation, it’s a good idea to speak to a financial advisor before paying your student loan early. They’ll go through your finances with a fine tooth comb and work out whether it’s a smart move for you. They might even be able to offer alternatives that you hadn’t thought of.

Learn more: Do I need a financial advisor?

Does student loan affect your credit rating?

No, student loans do not affect your credit rating. This is because student loans do not appear on your credit report, so do not impact your credit score. This means that even if you leave university with a large student loan debt, you can still have a good credit score.

Does paying off your student loan help your credit score?

Student loans do not affect your credit score, so any repayments or paying off your student loan early will not help or hinder your score. However, once you have paid back your loan fully the amount of money you have each month will increase, which can help with things like being approved for a mortgage because you'll have more take home pay.

When to pay off student loans early?

It may be a good idea to pay off your student loan early when you earn a high salary, you don’t have any other debts to pay and you don’t need to finance other types of loan like a mortgage where you might need to use your savings as a deposit.

Let us explain this in more detail:

• You’re a high earner. If your monthly payments are high and you’re set to pay off your student loan in full before the time limit, paying early could save you interest.
• You don’t have any other debts. If you don’t have any outstanding mortgages, credit cards, car finance agreements or personal loans, using spare cash to pay off your student debts could save you money.
• You’ll never need a mortgage or other type of loan. This one can be hard to predict, but if you’re very financially secure and you have no intention of taking out a mortgage or loan anytime soon, paying off your student debt could be worthwhile. 

Let’s look at the pros and cons of paying off student loans early:

Pros 

👍 Becoming student debt-free can be a big weight off your mind

If you break into a sweat every time you open a student loan statement, paying off your student loan early can have give you peace of mind. It might help you to feel less stressed and anxious, particularly if you’re debt-averse. 

👍 Paying off your student debt early could save you money in interest

Like other types of debt such as mortgages and credit cards, paying your student debt early could save you money on interest.

And yet, only a small percentage of students and graduates will be financially better off if they pay their student loans early. We’ll explain this in more detail in the cons section.

Cons

👎 Your student debt will be wiped (usually after 25-30 years)

This happens regardless of how much you’ve got left to pay. By making overpayments or paying your student debt off early, you may spend more on your university education than if you’d made the necessary repayments each month and waited for the remaining debt to be wiped.

According to the Institute For Fiscal Studies, 83% of students with English student loans won’t clear the debt within 30 years. 

👎 The amount you owe can differ from what you’ll actually repay. 

Since your repayments are tied to your income and your debt will be wiped after 25-30 years (depending on which loan type you have), the amount of debt you have will usually differ from the amount you’ll actually repay.  If you have Plan 1 (courses that began between September 1998 and August 2012), your debt will be written off 25 years after the April you were first due to repay. If you’re on Plan 2 (courses that began between 1 September 2012 and 31 July 2023), your debt will be written off  30 years after the April you were first due to repay.

So, in a way, it doesn’t matter whether you graduate with £27,000 of debt or £50,000 of debt. It also doesn’t matter if interest is added to the debt. If you’ve got a Plan 2 loan, you’ll only pay 9% of everything you earn above £27,295 a year. 

In fact, the more you owe, the less likely you are to clear the debt within the 30 year period. 

👎 Student debt doesn’t affect your credit rating

Your student debt won’t appear on your credit report and therefore won’t affect your credit rating, unlike other types of debt such as personal loans and mortgages. So, if you have any other outstanding debts, it’s usually worth prioritising those over your student loan. 

Something else to think about: If you use your savings to pay your student loan early only to get into financial difficulties later on, you may need to take out a loan or credit card that will affect your credit score. Keeping your cash in the bank could help you avoid financial emergencies and protect your credit rating. 

👎 Paying off your student debt early could hinder rather than help your chances of getting a mortgage

Student debt doesn’t affect your credit rating, but mortgage lenders will usually take your repayments into account when assessing how much to lend you. They’ll do this as part of their standard affordability checks. They simply want to make sure that once you’ve met all your other financial obligations, you can afford to pay them back.

Thinking of paying off your student loan to boost your mortgage chances or get a bigger mortgage? Not so fast! This could hinder your application rather than help it. You might be better off putting the money that you’re thinking of throwing at your student debt towards a bigger deposit on a property.

If you’re wondering how much you can borrow and what difference a bigger deposit will make, create a free Tembo plan today to get a free, personalised mortgage recommendation. 

How to pay off student loans early

If you decide to pay off your student loans early, you can make a payment by card, cheque or bank transfer. Simply sign into your student loan account via the government website to check your balance, find out which plan you’re on, and make any necessary changes.

You can also make a card payment towards your loan (or someone else’s) without signing into the online account. You’ll just need the account owner’s surname and customer reference number.

If you decide not to pay off your student loan early, it may be helpful to think of your monthly repayments as a tax rather than a debt. This won’t make your repayments any cheaper, of course, but it might help you make peace with it. 

Remember that if your income falls below your plan’s minimum threshold or you lose your job completely, your repayments will stop. Not only that, your outstanding debt will be wiped after a certain period of time, so no matter what’s going on with interest rates, your repayments won’t become unaffordable.