Should I pay off my student loan early?

Millions of people in the UK have outstanding student loans which they are paying back in monthly payments

Updated: June 7, 2024
Rebecca Goodman

Written By

Rebecca Goodman

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Millions of people in the UK have outstanding student loans which they are paying back in monthly payments.

While students of all ages can take out loans, this mainly relates to those who started their university course before August 2012 in England and Wales.

These are called Plan 1 student loans and at the time students were able to take out a loan to cover their tuition and living costs. 

While the loan is outstanding, anyone paying back one of these student loans is also paying interest. So, is it better for them to pay off the loan early and be free of these repayments? Or is there a better option if they have extra cash?

We take a look at everything you need to know in this guide.

What is the Plan 1 student loan?

Students going to universities in England and Wales between 1998 and 2011 (will probably have a Plan 1 student loan. This loan was designed to cover the costs of being at university, including tuition fees – which were around £3,000 per year at the time – and general living costs such as rent, groceries, and household bills.

These loans were repaid after a student graduated and they only start being paid back when a person is earning £24,990 per year. At this point, student loan payments are taken off automatically, before you receive your wages, unless you are self-employed.

The interest rate on these student loans is set every year and it is calculated by taking the lower of the following:

  • The Bank of England (BoE) base rate, plus 1%
  • The rate of the Retail Prices Index (RPI) measure for inflation

At the moment the interest rate is 6.25% which is one of the highest rates seen in years. This is because the base rate has risen dramatically over the last few years, as the BoE tries to control increasing levels of inflation.

When do you need to repay your student loan?

These student loans are repaid via your monthly income (if you’re employed) or you make payments towards them if you’re self-employed through your self-assessment tax return.

As your salary increases, the amount you pay back also rises. It is set out so repayments are 9% of anything a person earns, over the threshold of £24,990 a year. 

After 25 years, the student loan is automatically wiped if you haven’t cleared it. It is also cleared if someone dies or they’re unable to work because of illness on a permanent basis.

Does the student loan company owe you money?

It’s hard to keep track of student loan repayments. But it is important to keep on top of how much you are repaying as there have been several reports about students paying back more than they owe. An investigation by MoneySavingExpert.com last year showed that many people had overpaid by hundreds and in some cases thousands of pounds. 

This can happen for lots of reasons, 833,000 people repaid loans in the 2022/23 tax year despite not earning enough, for example, while 165,000 were on the wrong payment plan. 

If you think you have overpaid, you need to contact the Student Loans Company and ask for a refund. You can contact it online, via your account, or by calling 0300 100 0611. You can find out more details on the gov.uk website

Does paying off a student loan affect my credit score?

Paying off a student loan will not impact your credit score because it won’t be included in your credit history. Usually, any type of credit you take out is listed on your credit score. This is the case even if you apply for credit – such as car finance or a credit card – and you’re not accepted. But student loans are not counted here so they won’t make a difference to your credit score.

However, when you apply for a mortgage you will be asked what other loans you are paying back. A lender will also be able to see from your payslips that you are paying off a student loan and will take this into account when calculating how much money to lend you. This shouldn't make a dramatic difference though, as the loan reduces over time and it’s a very common one to have.

Should I pay off my loan if I have other debts?

The key rule when it comes to paying off debts is to clear those with the highest interest rates first. This allows you to become debt-free faster, because you will have more money to put towards clearing your debt as this money previously would have gone towards the higher interest payments.

The interest on a student loan is one of the lowest rates of interest. It’s currently set at 6.25% (the base rate plus 1%) and this is likely to be less than the interest rate you may be paying on other debts.

Therefore, it’s usually advised to focus on debts with bigger interest rates first, before you think about clearing your student loan. This won’t apply to all debts though, mortgages for example usually have early repayment charges if you clear them early – or make larger repayments.

If I have no debt, should I pay off my student loan?

If you’re debt free, but you are still paying back a student loan, it may be tempting to use any spare cash you have to clear it. However, there are pros and cons of doing this. If you clear the loan it means you are debt-free and the money is no longer coming off your wages.

But if you clear the loan this also means you may be using up your savings which could be making more money for you elsewhere. If the savings account pays a higher rate of interest than the student loan interest rate, you’re better off keeping the money in a savings account.

Historically it’s been easier to find a savings rate than is higher than the student loan interest rate. But right now that’s not possible – thanks to the Bank of England pushing up the base rate to 5.25% there are no savings accounts that beat 6.25%.

It’s also worth thinking about what else you would do with that money. If in the future you will need to borrow money – for a new car, a holiday, a wedding or similar – you may have to pay higher interest rate. It’s likely to be higher than the current student loan interest rate and this means it’ll cost you more overall. So, holding onto that money, could be a better (and cheaper) option for you.

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