Should I pay off my student loan early?

Could paying off your student loan early help you save more in the future?

While there’s a strong argument for paying off such a sizeable loan, there’s a lot to consider.

Why should you pay back your student loan early?

Your student loan is a large debt with a significant interest rate that could act as a long-term drag on your savings and financial goals. 

You must start making monthly repayments once you earn over a certain amount. So, the longer this debt remains unpaid, the more interest you could accrue. 

So, does it make sense to get this debt paid off as soon as possible? 

The answer to this question is not simple as your student loan doesn’t work like a traditional loan.

For example, you’ll only start making repayments once you earn over a certain amount. 

Depending on which loan plan you are on, any outstanding money that hasn’t been repaid after a set period will be wiped away.

Is paying off my student loan early right for me?

To decide whether paying back your loan early is a good decision, you will need to find out which student loan plan you are on, how much you need to pay back in total and how much of this loan you will repay through salary deductions. 

There are different loan plans, but usually, your plan depends on when you started your studies. 

If you started an undergraduate course before 1 September 2012, you are on Plan 1. So, you start repaying your student loan once you earn more than £24,990 a year, and you will repay 9% of your income over this amount.  

If you are on Plan 1, your debt is wiped either 25 years after the April you were first due to repay (if you took out your loan on or after 1 September 2006) or when you’re 65 (if you took your loan out before September 2006). 

Or, if you started your course between 1 September 2012 to 31 July 2023, you are on Plan 2. Under this plan, you start repaying your loan once you earn over £27,295 a year. You will repay 9% of your income over this amount. Any balance left on your student loan will be wiped 30 years after the April you were due to start repaying.

If you applied to Student Awards Agency Scotland, you are on Plan 4. You will start repaying your student loan once you earn more than £31,395 a year, and you will repay 9% of your income over this amount.

If you received your first payment after 1 August 2007, your loan will be written off after 30 years. If you received your first payment before August 2007, your loan is written off when you turn 65 or after 30 years, whichever comes first.

If you started an undergraduate course or Postgraduate Certificate of Education (PGCE) or take out an advanced learner loan on or after 1 August 2023, you're on Plan 5. 

You'll have to start paying back your loan when you earn over £25,000 a year and will have to repay 9% of your income over this amount. Any remaining loan will be written off 40 years after the April you were first due to start repaying the loan.

If you're on a postgraduate loan plan, the annual threshold for repayments is £21,000, and you'll have to repay 6% of your income over this threshold. Postgraduate loans will be written off after 30 years.

You should look at your monthly payslip to see whether you are repaying your student loan and, if so, exactly how much you are paying. 

You should now work out whether your current monthly contributions are likely to pay off your debts before they are written off.  

If, by paying a little extra, you can pay off your debt early, it may be worthwhile. The longer these repayments go on, the less money you will save for your future.

But if you’re unlikely to pay back your loan before it is written off, you may be better off saving your money. 

What alternatives are there to paying off your student loan early?

In many cases, paying extra towards your student loan isn’t worthwhile and won’t do much to help you achieve your financial goals. 

So, what could you be doing with your money instead?

There are more than a few ways to start saving for the future. Let’s look at some of the most common investments you can make.  

Savings accounts 

A savings account is commonly used to save for the future. You can often open an account with a small deposit and make regular contributions.

Some accounts let you access your savings when you want to, while others may be fixed term, meaning you can’t access your funds until the term ends. 

Savings accounts pay you interest on your savings, so the more you deposit, the more interest you’ll earn. 

But these interest rates can be low, so it’s worth shopping around.

And while these accounts offer some returns, they don’t offer the fastest or highest rate of return.  

Pensions

If planning for your retirement is your priority, one of the best saving strategies is contributing more to your pensions. 

Whether you have a personal or workplace pension, contributing extra money can boost your retirement savings.

But you can’t withdraw money from pension funds until you turn 55 (this will rise to 57 from April 2028), so you won’t be able to count on it in the short term. 

Investing 

Investing your money can generate better returns than keeping your money in a savings account. 

You can invest your money in a range of financial products and funds, and over time, you can see the value of your investments grow.

However, the value of your investments can rise and fall, so this option can be risky, and you should consider investing for at least five years to navigate any volatility. 

Property 

Saving enough money for a house deposit can take time, but it can also be one of the most financially rewarding decisions anyone can make. 

Investing in property is a popular way of shaping your financial future and may be less risky than other investments.  

Seek financial advice

Still not sure whether paying off your student debt early is the right decision for you? 

It’s a good idea to speak to a financial adviser who can help you make the best decisions based on your personal circumstances.

Unbiased can quickly match you with a qualified financial adviser.