Should I repay my student loan early?

How do student loans work?

Student loans are offered to students to cover their tuition fees and help with living expenses at university. There are currently two types of loans available to most students in the UK - a tuition fee loan and a maintenance loan.

The tuition fee loan is paid directly to the university and covers the cost of the course. The amount you get through the tuition fee loan will depend on your course cost.

The maintenance loan is designed to help with living expenses whilst you’re at university. The size of the maintenance loan you can access will depend on your household income and where you’ll live whilst studying.

The total amount you owe in student loans will be the total you’ve borrowed through the tuition fee loan and maintenance loan, plus interest.

Unlike other loans, such as personal loans, your student loan repayments are repaid through the tax system and your repayments are based on how much you earn. If you don’t earn above a certain amount, you won’t need to pay anything towards your student loan until you do.

If you haven’t repaid your student loan after a certain amount of time, it’s written off. The amount you have to earn to start repaying your student loan and how long it takes until it’s written off will depend on your repayment plan.

Student loan repayment plans

There are five main student loan repayment plans. Your repayment plan will depend on when you started university or where you studied.

Plan 1 - For loans taken out through Student Finance England or Wales before the 1st of September 2012, or any date undergraduate/postgraduate loans provided by Student Finance Northern Ireland
Plan 2 - For undergraduate or Postgraduate Certificate of Education (PGCE) loans taken out through Student Finance Wales after the 1st of September 2012 and from Student Finance England between 1st September 2012 and 31st July 2023
Plan 3 - More commonly called Postgraduate Loans - for any Master’s and Doctoral loans taken out through Student Finance England or Wales
Plan 4 - For any undergraduate/postgraduate loans provided by the Student Awards Agency Scotland
Plan 5 - For undergraduate or Postgraduate Certificate of Education (PGCE) courses started in England after 1st August 2023

How much interest you are charged on your loan, when you have to start repaying it and how much you have to repay, will depend on which plan you’re on.

Student loan interest

Interest is applied to student loans from the moment the first amount is paid to either you or your university. Interest will be charged monthly until your student loan is completely repaid or written off.

The amount of interest charged will depend on your repayment plan, with most plans calculating the interest rate either at the Bank of England (BofE) base rate or the Retail Price Index (RPI) measure of inflation, plus an additional percentage.

Plan 1 & Plan 4 - Student loan interest for those on repayment plans 1 and 4 is charged as either the RPI or BofE base rate plus 1%, whichever is lower. This interest rate is usually set on the 1st of September each year, though it can change throughout the year.
Plan 2 - If you’re on plan 2, your student loan interest will be charged at the RPI plus up to 3%, depending on your income and circumstances. If you earn below the threshold of £27,295, your interest rate will be charged as only the RPI. As you begin to earn over this amount, it goes up on a sliding scale up to the RPI plus 3%. If your plan 2 interest rate reaches the same level as loans available on the commercial market, it will be capped at that level instead.
Plan 3 - Postgraduate loans in England and Wales are charged interest at RPI plus 3%. Similarly to plan 2 loans, this interest rate can sometimes be capped to avoid higher interest rates than commercial loans.
Plan 5 - England's newest student loan repayment plan charges lower interest rates than current and previous students on Plan 2. Repayment plan 5 loans will be charged interest at the RPI, with no percentage added on top.

What is the Retail Price Index (RPI)?

RPI is a way of measuring inflation in the UK. It’s published monthly by the Office for National Statistics (ONS) and is one of several measures that track how the cost of living changes over time.

The RPI measures the average price changes of the goods and services that represent the typical spending patterns of households throughout the country. This typically includes the cost of food, clothing, housing and transportation.

When should I start repaying my student loan?

In the UK, student loan repayments are made through the tax system. You’re first eligible to make repayments in the following April after you finish your course. The amount you have to repay and the amount you have to earn before you start repaying your student loan will depend on the type of student loan you have.

Plan 1 - You’ll start repaying your student loan when your pre-tax earnings are over £22,015 per year (£423 a week or £1,834 a month)
Plan 2 - You’ll start repaying your student loan when your pre-tax earnings are above £27,295 per year (£524 a week or £2,274 a month)
Plan 3 (Postgraduate Loans) - You’ll start paying back Master’s loans and Doctoral loans when your pre-tax income is over £21,000 per year (£403 a week, £1,750 a month)
Plan 4 - You’ll start repaying your loan when your pre-tax income is above £27,660 a year (£532 a week or £2,305 a month)
Plan 5 - You’ll start to repay your student loan when your pre-tax income is over £25,000 per year (£480 a week or £2,083 a month)

If you’re on Plan 1 ,2 ,4 or 5 you’ll pay 9% of your income over your threshold amount.

If you have a postgraduate loan plan, you’ll repay 6% of your income over the threshold amount.

If you have an undergraduate loan, and a postgraduate loan, you pay them back separately e.g. if you earn between £21,000 - £27,295 you will start paying back your postgraduate loan but not a plan 2 undergraduate loan.

What happens if I don’t pay my student loan?

If you’re an employee, and earn over your student loan repayment plan threshold, repayments will be taken out of your wages at the same time as National Insurance and Income Tax.

You don’t need to do anything except check that you are on the right payment plan. If you’re employed, but also complete a self-assessment tax return, your employer will still deduct your student loan repayments from your wages.

If you’re self-employed, HMRC will calculate how much you need to make in student loan repayments. You’ll pay this at the same time you pay your taxes.

Because student loan repayments are taken automatically, it’s rare that you’re not repaying your student loan when you should be. However, if you don’t make payments when you should be, the Student Loans Company could take legal action against you.

If you haven’t managed to repay your student loan after a certain amount of time, it will be “cancelled”, which means that the debt gets written off, and you’ll no longer need to repay the loan.

The amount of time before your loan gets written off will depend on your repayment plan.

Plan 1 - If you’re on repayment plan 1, when your loan gets written off will depend on when you started your course:
- If you started your course before September 1st 2006, the loan will be written off when you’re 65
- If you started your course on or after September 1st 2006, your loan will be written off 25 years after the April following your graduation
Plan 2 & postgraduate loans - All plan 2 loans will be written off 30 years after the April following your graduation
Plan 4 - When your plan 4 loan gets cancelled will depend on the academic year you took out the loan:
- 2006-2007 or before: When you’re 65 or 30 years after the April following your graduation - whichever comes first
- 2007-2008 or later: 30 years after the April following your graduation
Plan 5 - The plan 5 loan will be cancelled 40 years after the April following your graduation

What happens to my student loan if I move abroad?

If you plan to leave the UK for more than three months, it’s important to let the Student Loans Company (SLC) know as soon as possible. They will confirm if you need to continue repaying your student loan while you’re out of the country, and if so, how much you will need to repay.

When you’re overseas the repayment amounts are based on the minimum repayment required under the plan for the country you’re in.

You have two options for making repayments while you’re abroad - either via international bank transfer or via your online account.

It’s essential to inform the SLC if you change your address - failure to keep them updated may result in problems with your repayment plan. Student loan rules can and do change, so it’s important to regularly check in with them for up-to-date information when living abroad.

Should I pay off my student loan in a lump sum?

Whether or not making early repayments towards your student loan or paying it off early using a lump sum is a good idea will depend on your circumstances. This includes thinking about how much you’re earning, how much you’re repaying each month, which repayment plan you’re on, how much you owe and whether or not you’re on track to repay the entire loan before it gets written off.

Today, the average student graduating from a university in England has over £45,000 in student loan debt. The government estimates that only 20% of undergraduates who began their studies in 2021/22 will manage to repay their student loans in full.

For some people, paying their student loan off early could reduce the amount they pay in interest and increase their future take-home pay. However, there are a number of things you should think about:

Do you have other debts?

Student loans are unlike any other form of debt, where the amount you repay each month isn’t calculated on how much you owe but rather on how much you earn. If you don’t earn above the threshold, you won’t make repayments. Compared to many other forms of borrowing, the amount you’ll repay each month could be reasonably small.

For example, if you earn £30,000 this year, the amount you’d repay on your student loan for the year would be £243 (just over £20 a month), no matter how much you owe.

If you have other forms of debt that make up a bigger part of your income, it may make financial sense to pay these off sooner. This may help you increase the amount of money you have to spend, save and invest each month.

The interest rate on student loans is also often lower than other debts such as personal loans, car loans and credit cards. Focusing on paying these off first could make you better off financially as you’ll pay less in interest.

Finally, paying off other debt first could also increase your financial stability. If you lose your job or experience a drop in income, you will still be expected to try and make repayments on other debts. However, if you drop below your student loan plan repayment threshold, all payments will stop until your income is above the threshold again.

Are you likely to pay it off without overpayments?

Before you decide to pay off your student loan with a lump sum payment, consider how much money it will save you overall. This will depend on how much you owe and how much you earn.

You may save money by paying it off sooner if you're a high earner. However, if you’re unlikely to ever repay your student loan on your current earnings and career progression, making lump sum payments towards your student loans might not make financial sense.

When calculating if it’s likely you’ll pay your student loan off, also consider if you’re likely to take any time out of work. This could be to have and look after children, go travelling or volunteer. As soon as your income falls below the threshold you’ll stop making student loan repayments. You may therefore want to consider saving money to fund these non-working periods rather than paying off your student loan.

Could you get better returns somewhere else?

If you’ve recently come into a large sum of money, or have a large amount of savings, you may be considering using this to pay off your student loan. However, it’s important to consider if you will get better returns elsewhere.

Depending on current interest rates, how much you can save and how much you earn, putting your money into a savings account may offer you higher returns.

For example, if you were to earn £35,000 a year and have remaining student loans of £20,000 but have recently inherited £30,000. Paying off your student loan would save you £693 a year on a £35,000 salary. But putting that £20,000 into a 1-year fixed-rate savings account with a 5% interest rate would earn you £1,000 in interest for that year.

Of course, if you’re a high earner, you’ll be making significantly larger student loan repayments, and therefore you may save more money each month by paying off your student loan than you’d earn in interest from a savings account.

Whether or not paying off your student loan early is a good idea ultimately depends on your circumstances. If you’re still unsure if repaying your student loan is wise, it may be worth talking to a financial adviser about your circumstances and what makes the most sense for you.