Should I Pay Off My Student Loan Early?

by , Last Updated: 11 November 2014

While your student loan is likely to be one of the cheapest loans you'll ever get, it can also be a burden that many will want to clear as soon as possible. But is it worth paying off your student loan early? We weigh up your options.

Student Piggy Bank

If you have a student loan to pay off, you're certainly not alone. Thousands of people in the UK are currently saddled with the debt left over from their student heyday, whether they've been making repayments on it for years or have only just started chipping away at the balance.

Recent changes in the RPI (Retail Price Index) mean that for the 2010/2011 academic year interest rates on student loans have shot up to 4.4% (for those who took out their loans before 1998) or 1.5% (for those who took out their loans after 1998).  But should you give this debt priority over other loans you're yet to pay off, or even clear it early altogether if you have the means?

Why pay off your student loan early?

If you're earning 15,000 or more, 9% of your monthly salary will automatically be deducted to go towards paying off your student loan. For loans of a sizeable amount and factoring in interest accrued, this will mean your loan will take years to pay off.

It may just be that you want to speed up this process so that your student loan isn't a burden to you any longer than it has to be, and so that you have one less debt to worry about. This might particularly apply if you have had the debt for a while, or just want to rid yourself of as much debt as possible.

What's more, as student loans don't come with penalties for early repayment such as the Early Repayment Charges that come with other loans and mortgages, there's no harm in clearing the debt earlier than you need to.

What if I have other debts to pay off too?

If you have other outstanding debts in addition to your student loan, it will be worth thinking carefully about overpaying on your student loan while these other debts are still accumulating interest.

For example, if you have credit card debt, an overdraft that isn't interest-free, or any other debt that is accruing interest at a higher rate than your student loan, it's advisable to prioritise these in your debt-clearing plan.

Student loan interest rates currently stand at 1.5% for those who started university after 1998, and 4.4% for pre-1998 starters, so any other interest-earning debts you have will be costing you more than your student loan. In this way it makes sense to pay off your other debts first before you turn your attention to your student loan.

It's also worth noting that student loans are unlike other debts in that you only ever have to make repayments if you are earning over the 15,000 threshold; i.e. you pay back only when you can afford to do so. In this way there's no risk of the debt becoming a burden that you can't handle; if you fall ill and can't work or your income drops, you will simply stop making repayments until you are able to meet them again.

What if I have no other debts?

If your student loan is the only outstanding debt you have, and you have some cash to spare, making overpayments on your loan to clear it more quickly may seem like the sensible thing to do. However it's worth considering the alternatives before you begin injecting all your disposable income into the loan-clearing cause.

For example, you may consider putting the money instead into a high interest savings account to allow it to earn interest. Funds in a savings account will effectively be earning more than your loan is costing you, at a time when student loan interest rates are so low.

After you have built up a decent amount in your kitty you could use it to pay off your student loan in one go if you were so inclined. Otherwise the money may come in useful for some other purpose such as a deposit for a house or buying a new car - in this way you'll be able to fund the purchase yourself instead of taking out a costly loan with the bank.

Either way, you will have built up some valuable funds while in the meantime your student loan debt is unlikely to spiral out of control. It's worth noting that a student loan is probably the cheapest long-term debt you will ever have.

What else should I consider?

Though your student loan is a cheap form of long-term borrowing, it's still important to recognise that it is a debt and shouldn't be ignored.

If you have no other ongoing debts, have cash to spare, and would rather say goodbye to your student loan debt than put the money in savings, you can make overpayments on your loan in the following ways:

  • Pay an additional amount online to the Student Loans Company with a credit or debit card. A minimum of 5 applies, and you'll be charged 1.5% extra if you pay by credit card.
     
  • Send a cheque or postal order to the Student Loans Company, making sure to write your Student Support Number on the back.
     
  • Set up a direct debit by contacting a Student Loans Company adviser.

It's worth noting that no refunds can be made in respect of these overpayments if you change your mind, so make sure you are happy with this arrangement before sending off your additional repayments.

Finally, for those who would rather wait it out, all student loan debts will be wiped at some point later in your life. If you started university between 1990 and 1997 and are under 40, your debt will be written off when you reach 50 or 25 years after repayments were first due, whichever comes sooner.

For 1998-2005 starters, student debts will be disregarded when you reach 65. Lastly for those starting university in 2006 and after, your debt will be wiped 25 years after repayments were first due. All student debts will be unequivocally wiped upon death or if you become permanently unfit to work.

Responses

add your response here

would there be any consequences of paying the loan at a slow rate and wait until the 25 years is over for the debt to be wiped clear.

by Jagmo, 22 Sep 2010

Be aware that if you pay it off early, your employer is not told until the end of the tax year. HMRC tell the student loan company what has been deducted at the end of the year. Just been caught out since we paid off our daughters loan but she was still getting deductions. While it will come back, that money could have been in my pocket, rather than the governments.

by elain34, 5 Oct 2011

Sally, I took out a student loan prior to 1996 and recall a clause similar to the one you have quoted... however, I need evidence of this. Please could you tell me where you got this information from.

Ref: your quote : "Finally, for those who would rather wait it out, all student loan debts will be wiped at some point later in your life. If you started university between 1990 and 1997 and are under 40, your debt will be written off when you reach 50 or 25 years after repayments were first due, whichever comes sooner."

by luckwithloot, 13 Apr 2013

Can one negotiate the full repayment amount of a UK Student Loan? If this is possible, what is the best process?

by hfried, 9 Oct 2013
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