Student loans: Should I pay off early? header image

The government has announced plans to enable adults of any age to apply for four year student loans for college or university. But how about paying back existing student loans?

The rules are complex so we’ve picked out some key points to help explain them. We focus on students who started their course after 1st September 2012.

You’ve left college or university and you’ve started earning. Is it time to start paying down your student debt with extra payments? Perhaps counter-intuitively, overpaying on your student loan isn’t always the best approach - it often depends on how much you earn and where you studied.

Obligatory student loan repayments start the April after you graduate. Students need to pay back 9% of earnings above a certain threshold. The exact repayment plan depends on where you’re from in the UK and when you started studying.

In fact, only 17% of UK students will pay everything back, according to The Institute for Fiscal Studies. After 30 years (or 25 if you’re from Northern Ireland), your remaining student loan balance is cleared, provided you started studying after 2012. So, if your student debt will be cleared, should you pay back more than you have to?

The basics of loan repayments

First off, if you have any additional higher interest debt it usually makes sense to pay that back first, before overpaying your student loan.

If you’re from England or Wales, you start making student loan repayments once your annual pre-tax earnings exceed £27,295. If you’re from Scotland it’s £25,000 and Northern Ireland (NI) is £19,895.

Graduatejobs.com, a graduate recruitment website, believes the 2021 average starting salary for a UK graduate to be around £25,650. But salary estimates do differ and they also vary by region, with the Luminary foundation placing the starting average in Wales at £22,270 and London at £27,256.

Your annual repayment is set at 9% above the threshold level. If the threshold is £27,295, you will pay back 9% of anything above. This means the annual repayment is determined by earnings, rather than how much you owe.

The amount you owe includes the original loan plus any interest accumulated.

The cost of repayments

If you’re from England or Wales and earn a high salary, it may make sense to overpay your student loan, assuming you have no other debts and don’t plan on taking any on.

For example, if you started studying a three-year course in 2017, graduate with a balance of around £61,000 debt (£9,250 annual tuition fee and £8,944 annual maintenance loan, plus interest) and earn £45,000 per year with 4% annual salary growth, it will take you about 22 years to clear your debt.

However, when you earn more than £49,130, a higher interest rate of 5.6% applies to your loan. With the 4% annual pay rise, you’ll pass this threshold after three years, earning about £50,600. The effect of the higher interest, means that you’ll end up paying back more than double your original loan (around £140,000). We’ll go through the interest rates in more detail below. But in this case, it can make sense to make additional repayments to clear the debt more quickly.

But for those on lower annual salaries or lower interest rates for their student loan (eg. students from Scotland or Northern Ireland), it’s not so obvious whether you should overpay student debt. The following example shows why.

If you’re from England or Wales, started studying a three-year course in 2017, graduate with around £61,000 in student debt and have a salary of £24,000 with 2% salary growth, you will have paid around £38,500 in required repayments after 30 years. Your remaining balance will be cleared, without you having made any additional repayments. If it will be cleared, why pay back extra?

You can explore some other repayment paths with this Student Loan Calculator (English and Welsh students, 2012 + starters).

Know your interest rates

Student loan interest rates aren’t the same for everyone - they depend on where you’re from, what you earn, the Bank of England base rate (national borrowing rate) and the Retail Price Index (RPI) rate of inflation.

Scottish and NI students pay the lower of either the Bank of England base rate + 1% or RPI. For students from England or Wales, the interest rate is only linked to RPI (see the table below).

Interest rates for students that began studying after 1st September 2012

Annual earnings before tax Student loan from Scotland/Northern Ireland Student loan from England/Wales
While studying until April after graduation 1.1% (Bank of England base rate + 1%) 5.6% (RPI + 3%)
Under £27,295 1.1% 2.6% (RPI)
Between £27,295 and £49,130 1.1% Variable (rising from RPI to RPI + 3%)
Over £49,130 1.1% 5.6% (RPI + 3%)

The above article is intended as general information and does not constitute advice in any way. You should take independent financial advice if you have any questions about your specific circumstances. Figures correct at date of publication.

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