Should you pay off your student loan early?
to-high-earners may pay real interest, but still not everything on the statement. So for all those groups, the interest you see added to your statement is NOT the interest you pay.
The only people for whom statements tell the truth is that top 17% of earners who’ll clear within the 30 years.
Tragically, the pressure of seeing that oft-irrelevant interest build-up pushes people to make mistakes. One woman told me she’d used an inheritance of a few thousand to overpay her student loan to “reduce the interest”. Yet she was a low earner, so that overpayment’s unlikely to reduce what she’ll pay in future by even a penny. It’s money flushed down the loo, as you can’t get back what you voluntarily overpay.
Therefore those with spare cash should use it first to clear other expensive debt. After that, save it to reduce the need for future borrowing. I’d suggest building up a mortgage deposit – a far better use of the cash (see mse.me/LifetimeISAs ).
After all, with other debts they still chase you if you lose your job, but with student loans lower income means you don’t repay.
Only those who’ll be consistently high earners over the 30 years, and won’t need to borrow anywhere else, can truly say, “The interest is higher than I can earn saving, so I’ll pay it off ”. PLAN 1 LOANS: Here, the logic is different to Plan 2, as you likely borrowed less originally, and you repay MORE each year (9% of everything earned over £18,935). Therefore you’re far more likely to clear the debt before it wipes. However, the interest rate here is far cheaper, set at the LOWER of either the rate of inflation, or the Bank of England base rate plus 1%. So currently it’s 1.75%.
That’s cheaper than almost all other long-term borrowing, so definitely clear those first. Yet even if you’ve no borrowing now and will never need it, the top fixed savings accounts (see mse.me/topsavings ) pay more than this loan charges you. As long as you trust yourself not to splurge it, most people should just save it there rather than overpay their loan. For more detail on this see my Repay Plan 1 loan video at mse.merepayplan1 . MORTGAGE-STYLE LOANS: These are very different. Unless you earn over the £32,347 threshold, you can defer and not repay. If you earn above the threshold you pay in fixed instalments, like a personal loan.
However if your loan is still outstanding now, for most it’s unlikely you’ll clear it before it wipes. So why overpay? And even if you do clear it, the interest rate is set at the rate of inflation, so there’s no real cost anyway.