My student loan has increased by 25% in six years… should I pay it off early?

I went to university between 2014 and 2018 which means I’m on the student repayment plan type 2. 

I borrowed £27,865 for my tuition fees and £13,051 for maintenance, meaning a total of £40,916.

I started my first ‘proper’ job after University in 2018 with a starting salary of £28,000 and have been over the threshold to make loan repayments since then. 

My salary has increased over the years and it is now around the £60,000 mark.

Should I repay my student loan early to avoid accruing more interest?

Should I repay my student loan early to avoid accruing more interest?

I was shocked to find in my latest pay slip that my monthly student loan repayment is now £250. At first, I thought there must be a mistake. 

I remember being told at school that it would only be the same amount as a mobile phone contract (£40-£50 a month) and it gets wiped after 30 years, so not to worry about it.

I looked into it more and found that my student loan had increased by £10,000, equivalent to a 25 per cent increase, in the six years since leaving university. I am paying £250 a month and I’m not even covering the interest.

I know the loan will be wiped 30 years on from when I left university in 2048, but I am wondering if I should:

a) Keep paying the monthly repayment, hope the interest will come down and try to forget about it.

b) Start saving money to pay off the loan early to avoid paying the interest. For example, save up to make a lump sum payment once a year to pay off a chunk of the loan. I assume I’m allowed to do this. RC

Angharad Carrick of This Is Money replies: Anyone repaying a student loan will know all too well the feeling of checking their balance only to see it has increased by thousands of pounds since graduation.

This is especially true for those who started their course after 2012, when fees jumped dramatically from around £3,000 to around £9,000 per academic year.  

The first thing to explain is that the student loan system is quite complicated, and there are different levels of interest depending on which plan you’re on.

Unlike a standard loan, the system acts more like a ‘graduate tax’ and increases the more you earn. There are currently five different repayment plans that will determine both when you pay your loan back, and how much you pay.

When will I pay back my student loan? 

For those on Plan 2 like you, who went to university between 1 September 2012 and 31 July 2023, you will start to repay your loan once your income is over £27,295.

Those who started university before 1 September 2012 will be on Plan 1 and start repaying once they earn over £22,015 a year, while those who started after 1 September 2023 will be on Plan 5 and start to repay when they earn over £25,000 in a year.

In Scotland, students are on Plan 4 and will start to pay back the loan once earning over £27,660 a year.

All undergraduates, regardless of the plan they’re on, will pay 9 per cent of their income over the threshold, while those with postgraduate loans pay 6 per cent.

For someone like yourself earning £60,000 a year, you would pay 9 per cent of the £32,705 you earn over the threshold which equates to £245 a month.

What interest is charged on student loans?  

The level of interest applied to the loan is another matter and one that has been a bone of contention for many graduates.

These have typically been based on the Retail Price Index rate of inflation (RPI) rather than the Consumer Price Index (CPI), which is more commonly used to measure inflation.

However, when RPI soared to 13.5 per cent in March 2023, the Government introduced a cap of 7.6 per cent for all student loans.

The current level of interest on each plan is as follows:

  • 7.6% on the postgraduate loan plan

Those earning under £27,295 just accrue the RPI rate in interest, while those earning between £27,296 to £39,130 pay RPI plus up to 3 per cent, as the rate increases the more you earn.

Those earning over £49,130 are charged RPI plus 3 per cent.

It is understandable that to beat the interest which could accumulate over decades you would look into paying it off sooner.

We asked two experts for their advice on what you should do.

You will pay back 9% of your income towards your student loan repayments

You will pay back 9% of your income towards your student loan repayments 

Alice Haine, personal finance analyst at Bestinvest says: Nobody wants to see thousands of pounds of added interest, but before panicking and coming up with a plan to pay it off, the best strategy for most is to ignore the interest applied altogether. 

Instead, just pay the amount you owe every month and direct savings towards other financial goals.

The number to focus on is the amount you must repay each month. For graduates on Plan 2, this is set at a rate of 9 per cent on everything a student earns above £27,295, the equivalent of £2,274 a month before tax, which effectively means the amount you owe (your total borrowings plus interest) will never determine how much you must repay every year. 

That rule applies to all earnings from your regular job, whether employed or self-employed, as well as earnings from investments or savings accounts.

For someone like yourself earning £60,000, you pay 9 per cent of the £32,705 you earn above the threshold, which equates to £2,943 a year or around £245 a month. 

While it can be disheartening to see that what you owe is increasing in size rather than decreasing with your payments, depending on your future earnings you may never clear what you owe in full as any outstanding balance on the loan is wiped 30 years from the first April after graduation. 

Ian Futcher, financial planner at Quilter replies: Can I and should I pay my student loan off early? These are two questions that are likely to be on the minds of many university graduates, particularly due to the fact that as inflation and interest rates have risen, many will have seen large amounts of interest added to their student loans.

 If you are unlikely to clear the loan in 30 years it is very likely that the money will be better used elsewhere

In short, you can make additional payments to your loan, and this is what we would typically recommend with a loan with lots of high interest. However, paying off a student loan early is not as straighforward.

Student loans are not the same as traditional loans, and before you look at the possibility of paying extra towards your student loan, it is important to have a good understanding of how they work.

You have seen over £5,000 in interest added to your loan in just a short period, and you certainly will not be alone. 

This can be extremely daunting and if this was a traditional loan it would make sense to make additional payments to pay off the interest and loan as quickly as possible, but as it is a student loan, this may not be the best course of action.

Firstly, it is important to remember that regardless of how much you owe, what you pay back will not change – it is always 9 per cent of what you earn above the threshold.

Quilter's Ian Futcher says paying off your loan early depends on how much you owe

Quilter’s Ian Futcher says paying off your loan early depends on how much you owe 

What you pay will only change with what you earn, so if your salary rose to £70,000, your monthly payments would increase to around £320. 

Similarly, if your earnings dropped to £50,000 then the monthly payments would drop to approximately £170. So, although an increasing loan seems daunting, it will not impact how much you pay each month.

The second thing to take note of is that the loan will be wiped after 30 years, regardless of how much you have paid back. This will not class as a default; it is just the way the system works.

Let’s imagine there is no interest added. You started with a £40,000 loan, so even if you paid off an average of £2,000 a year it would take 20 years to clear. 

Once you add interest, the likelihood of paying it off in 30 years drops significantly. In fact, the Institute of Fiscal Studies suggests only 83 per cent of people will ever pay off their student loan before the 30 years is up.

So, is it worth paying off your loan early? This depends on how much you owe. 

If you owe a small amount and you could pay off the loan or make additional payments, then it may be worth considering. 

But if you owe a much larger amount, as in this instance, then paying small lump sums or additional amounts will not change what you pay each year, and if you are unlikely to clear the loan in 30 years it is very likely that the money will be better used elsewhere – such as saving for house or putting it away for retirement.

Determining if it is worth paying will depend on your personal financial circumstances, and seeking professional financial advice will be key in helping decide what is best for you in the longer run.

Alice Haine adds: Even higher earners like yourself may never clear the loan in full. While it may be tempting to overpay, your salary may change in the future, so overpaying now may not make sense. 

You may have a career break to raise a family, take time off for illness, go part-time, move to a job with a lower salary – all instances that could see your salary dip below the threshold at which you must repay. Dying prematurely will also wipe the debt.

If, however, you are certain your career will continue to flourish and expect to earn a very high salary in the future, then it may make more sense to clear the debt entirely, particularly if your family are willing to help, or to overpay to clear the debt quicker and reduce the interest rate charges applied.

None of us can see into the future, so for now it might be better to ignore the interest rate, accept the monthly payment and focus on saving towards other key financial goals. 

Graduates in the early stages of a career have many financial priorities such as saving for a home deposit or raising a family, so if it was up to me, I’d focus on those instead.

If the student loan repayments really bother you, however, and you are convinced that you are set for a successful, well-paid career then go ahead and save to clear the loan earlier. 

But none of us ever know what will happen in the future – so think carefully before committing funds you may need for other things.

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