From the first day you start receiving your student loan, the amount you owe starts to build up interest, meaning you may end up owing much more to the Student Loans Company than you originally borrowed. But is it worth paying your loan off early?
Growing Debt
For those who went to University, student debt can sometimes feel like a burden that constantly hangs over your head, eating away at your payslips once you start earning over a certain amount.
The amount that you owe may never seem to substantially decrease, due to the interest that constantly builds. This can make it feel as though you are simply chasing the interest rather than paying off the loan itself.
How much interest you are charged depends on what plan you are on. This is currently:
- 6.25% for those on Plan 1
- 7.9% for Plan 2 loans
- 6.25% for Plan 4
- 7.9% for those on Plan 5
- 7.9% for people on Postgraduate Loan plans
However, throwing any spare money you have into paying off your student loan as quickly as possible through voluntary contributions isn’t necessarily the best approach…
Repayment Thresholds
Student loans don’t function like ordinary loans – you only start making repayments once you earn a certain amount of money. The repayment threshold is determined by when you started your studies:
- Plan 1 loans – repayment threshold of £24,990 a year
- Plan 2 -repayment threshold of £27,295 a year
- Plan 4 – repayment threshold of £31,395 a year
- Plan 5 – repayment threshold of £25,000 a year
- Postgraduate loan – repayment threshold of £21,000 a year
You will pay 9% of your income above your repayment threshold if you are on a Plan 1,2,4 or 5 loan, and 6% of your income if you’re on a postgraduate loan plan.
This makes student loans very different to ordinary loans, as you are not expected to make repayments when you cannot afford it. Therefore, it’s best to think of your student loan more like an extra tax, rather than as an actual loan. Although you owe money, you are only expected to make repayments when you can afford them, they are taken out of your salary automatically just like income tax and national insurance, and your debt is written off after a certain amount of time.
Wiping Your Debt
Your student loan is automatically wiped after a set period of time, even if you have not paid off your loan in full (which many people don’t). This is something to bear in mind if you are considering making voluntary contributions, as this could lead to you unnecessarily repaying a debt you don’t actually need to; any outstanding balance will eventually be wiped anyway, regardless of how much you have repaid.
- If you have a Plan 1 loan which you started receiving on or after 1st September 2006, your loans will be written off 25 years after the April in which you were first due to repay. If you were paid the first loan of your Plan 1 loan before 1st September 2006, your loan will be written off when you reach age 65
- Plan 2 loans are written off 30 years after the April you were first due to repay
- If you have a Plan 4 loan which you started to receive on or after 1st August 2007, your loans will be written off 30 years after the April you were first due to start repayments. If you started to receive your Plan 4 loan before this, it will be written off when you are 65, or 30 years after the April you were first due to repay, whichever is first
- Plan 5 loans are written off 40 years after the April you were first due to repay
- Postgraduate loans are written off 30 years after the April you were first due to repay
Overall, whether you want to make additional contributions towards your student loan will depend on your own personal and financial circumstances.
However, you should ensure that you fully understand how student loans actually work before doing so. It is always worth seeking advice from a fully qualified and regulated financial adviser to help you make these kinds of decisions.