For many of us, student debt is at the back of our minds. That’s until that yearly statement comes through the door, with plenty of 0’s to get even the most stoic ex-student feeling the money anxiety.
So, when it comes to deciphering that annual statement, is it worth paying off your loan early? Or is keeping your debt ticking over the best option? While a student loan is, indeed, a form of debt, that doesn’t necessarily mean it needs to be paid off as quickly as possible.
Read on to find out more about your student loan, including whether it’s a good idea to start making additional payments to bring down that debt today.
Which student loan do you have?
The first step to paying off your student debt is knowing exactly what type of loan you currently have. In the UK, there are currently two specific types of loans – which will differ depending on exactly when you went to university:
For students in England or Wales that attended an undergraduate course before the 1st of September 2012, Plan 1 will apply for their debt. If you happen to live in Northern Ireland or Scotland, the same applies, but the date is after the 1st of September 1998.
For students in England or Wales that attended an undergraduate course after the 1st of September 2012, Plan 2 will apply for their debt. All Northern Ireland and Scotland students remain on Plan 1.
Regardless of which plan your student debt falls under, you’ll be expected to start repaying your loan from the 6th of April in the year you graduate. But before you start to panic, there are a few stipulations to that – and the exact requirements differ depending on which ‘plan’ you fall under.
Plan 1 repayments
For ex-students under Plan 1 earning over £19,390 (as of April 2020), you’ll be required to pay back 9% of your earnings above this specific amount.
Plan 2 repayments
For ex-students under Plan 2 earning over £25,725, you’ll be required to pay back 9% of your earnings above this specific amount.
See more on this at https://www.gov.uk/repaying-your-student-loan/what-you-pay
So for whichever plan you happen to be under, if you’re earning under the threshold, you won’t be paying your loan back at all currently. This works similarly to how your tax code functions – income over a certain earning threshold is taxed, much as income over a certain earning threshold is charged for your student loan. Much like taxes, this amount is deducted straight from your earnings if you’re employed—so no need to hand over the cash yourself each month or keep up with the maths.
So, should you repay your student loan early?
Now you’ve got a stronger understanding of how, exactly, student loans work – is it worth paying them off early?
Honestly, it depends on several factors. If you have a high income, no debt and you’re not planning on introducing any debt in the future, then paying off that full student loan balance could be a weight off your shoulders. But for most of us, overpayment isn’t worth it.
Unlike a traditional loan, a student loan doesn’t have a high rate of interest that makes paying it off a challenge. Instead, your student loan interest is in line with either the Bank of England base rate (for Plan 1, plus 1%) or the UK Retail Price Index (for Plan 2, plus 3%). So realistically, paying off your loan regularly is your best bet – and you won’t be losing out on much if you do.
It’s also worth noting that your student loan isn’t indefinite. If you graduated from university before the academic year of 2005/2006, your loan will be cleared from you at the age of 65 – even if you’ve never paid a penny. For graduates who completed their course after 2006, your loan will be cleared after 25 years from your graduation year. After 2012, and it’ll be cleared in 30 years.
For some, the idea of having debt can be a tough one. Money is a huge source of stress for many people, but your student loan shouldn’t factor into that worry. There’s no such thing as late or missed payments if you’re employed. Even if you’re self-employed, the process of keeping up-to-date on your student loan payments is easy, as part of paying your taxes.
What should I do instead?
If you want to get in better financial shape, we’d suggest that you probably shouldn’t overpay on your student loan. Instead, focus on more immediate debts or income to get your bank balance looking as healthy as possible. Other loans, credit cards and even mortgages have a far higher rate of interest, so paying those down is a far better use of your hard-earned cash.
If you’re not in debt currently, building a savings pot is the next step. Whether you’re saving for your first home, an emergency fund or even a second property, having cash is far better for you than credit. So let your student loans tick over and start focusing on the smaller picture. Paying off student finance early might seem like it’s a worthwhile thing to do, but in the long-term, there are far better ways to invest your money into your future.