Is It Worth Paying Off Your Student Loan Early?
By Arlyne Chinyanganya, Founder of Roots to Froots
When I finally paid off my student loan, I felt an overwhelming sense of relief and freedom. Seeing that extra money land in my bank account each month, free from deductions, felt like a weight being lifted off my shoulders. It was a milestone I had worked towards for years, but looking back, it made me reflect: Was paying off my student loan early the best financial decision? And more importantly, is it the right decision for everyone?
As someone who now works to empower people with financial knowledge and tools, I often get asked this very question. So, let’s explore when it makes sense to pay off your student loan early and when it might not be worth prioritizing.
The Nature of UK Student Loans
Before we dive into repayment strategies, it’s important to understand the unique nature of student loans in the UK. Unlike a traditional bank loan, a student loan operates more like a graduate tax. Your repayments are based on how much you earn, not on the total amount you owe.
For most borrowers:
- Plan 1 loans (students from 1998 to 2011) payments required of 9% of any income above £22,015
- Plan 2 loans (students starting from 2012) require repayments of 9% of any income above £27,295.
- Plan 5 loans (students starting from 2023) have a slightly lower repayment threshold of £25,000, but loans last longer—40 years before being written off.
The critical point? For many graduates, the debt will never be repaid in full because of how the repayment system is designed. In fact, government statistics show that only about 27% of graduates with Plan 2 loans will repay their debt in full before it is written off.
My Student Loan Journey
I graduated from Birmingham City University in 2011 with a degree in Business and Finance. My tuition fees were only £3,000 a year back then (lucky me!) and I borrowed about £21,000 in total to cover tuition and living expenses. After I graduated, I landed my first role on a graduate scheme and started repaying my Plan 1 loan, where interest was tied to the Bank of England’s base rate. Thankfully, this rate never went above 1.75%, which made my repayments manageable.
However, by 2017, I wanted to speed things up. I was saving for a flat, and my student loan deductions were reducing my take-home pay—this also affected how much I could borrow for my mortgage. So, I started overpaying an extra £100 per month. By 2022, I’d cleared the debt entirely, totaling about £23,400 in repayments over 11 years.
While I don’t regret paying it off, I know my circumstances were unique. For many graduates, especially those on newer student loan plans, early repayment might not be the best financial move. Let me explain why.
When It Might Not Make Sense to Pay Early
- Your Debt Might Be Written Off Anyway
With Plan 2 loans written off after 30 years and Plan 5 loans after 40 years, many graduates won’t earn enough to repay their full balance. If your salary is unlikely to increase significantly, it might not make sense to prioritize repayment. - Interest Isn’t Always a Concern
Yes, interest rates on student loans can be high—up to 7.3% for some Plan 2 loans. However, because repayments are based on your salary, the amount of interest accruing doesn’t impact how much you pay each month. - Other Financial Goals Should Take Priority
If you’re saving for a house, building an emergency fund, or investing for the future, these goals might have a bigger impact on your financial stability than paying off a student loan.
When It Might Make Sense to Pay Early
On the other hand, there are situations where early repayment could be beneficial:
- You’re a High Earner
If your salary is significantly above the repayment threshold (e.g., £50,000+ for Plan 2 loans), you’ll likely repay the full balance and accrue substantial interest over time. In this case, overpayments could save you money in the long run. - You Want to Improve Your Mortgage Affordability
Student loan repayments reduce your disposable income, which mortgage lenders take into account. Clearing your loan could make you eligible to borrow more. - You’re Looking for Peace of Mind
For some people, debt—any debt—is a source of stress. If clearing your loan early would give you peace of mind and you have the financial means to do so, it might be worth it.
So, Is It Like a Tax We Should Accept?
Many financial experts describe UK student loans as a “graduate tax” because they’re tied to income and written off after a set period. If you’re on a modest income, repayments are manageable, and the loan likely won’t impact your ability to build wealth. But for higher earners, the interest on these loans can stack up, and repayment might start to feel like a burden.
Key Takeaways
- Know Your Numbers: Understand your loan plan, repayment threshold, and interest rate. Use tools like online loan calculators to project how much you’ll repay over time.
- Set Priorities: Consider whether repaying your loan early aligns with your current financial goals.
- Get Advice: If you’re unsure, speak to a financial coach or advisor to explore your options.
My Guidance to You
Every financial decision is personal. There’s no one-size-fits-all answer when it comes to student loans, and the “right” choice depends on your unique circumstances. My thoughts? Focus on what gives you the most financial freedom and peace of mind.
If you’re unsure about your next steps, Roots to Froots is here to help. Our personalised consultations can guide you through financial planning, including managing debt, saving for the future, and achieving your life goals.
To learn more about this topic, visit the full blog on our website and let’s start a conversation. Remember, financial wellness isn’t just about the numbers—it’s about making decisions that work for YOU.
Call to Action
- Share this blog with someone who might find it helpful.
- Listen to our latest podcast From Roots to Froots
- Book a consultation with Roots to Froots and take the next step towards financial freedom.
Until next time, keep growing those froots! 🌱