Should I pay off my student loan early?

Should I pay off my student loan early?

Should I consider paying off my student debt early?

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The answer is almost certainly not. Usually when it comes to debt, overpaying to clear what you owe and paying less interest makes good financial sense. But student loans are one of the few areas where it may not be in your best interests to pay extra.

This is because most people never clear their loans in full before the government wipes the debt. The government clears your loan including any interest left unpaid either 25 or 30 years after you start paying or when you turn 65. How long you pay depends on which student loan plan you’re on.

Since the vast majority of people don’t clear their loan before that deadline, voluntarily paying extra cash won’t either mean you pay less or clear the loan sooner – it’s just wasted money.

Lots of people panic about ?50,000 debts and rising interest rates, but actually these are mostly irrelevant. If you were never going to clear the loan in 30 years anyway, then all the extra interest is just more money that gets wiped by the government at the end. Student loans don’t go on your credit file either, so it’s not treated as a debt in the traditional sense when you’re trying to borrow from lenders.

It makes far more sense to try and think about student loans as a tax. Irrespective of how much you borrow or how much interest is charged, you are charged a flat rate when you start earning. If you have a Plan 2 loan, you’ll have to pay 9% your salary above ?27,288. If you earn less than this, that means you won’t pay anything at all. If you’re on Plan 1, the threshold is ?19,884.

Written by Dan Base, Financial Content Writer

The average (median) salary in the UK was ?29,900 in 2020. Someone earning that much would pay ? a year or ? a month on Plan 2. Assuming you graduated and immediately earned the median salary (and didn’t get any pay rises either) over your lifetime you’d pay back just ?7, nowhere near the amount you borrowed.

If you never earned over ?27,288 you wouldn’t have to pay back a single penny of the loan. The debt is also cleared if you die, so it can’t be passed onto your children or beneficiaries.

You’d need to start working on a salary of about ?55,000 and expect to earn well over ?100,000 within 30 years to pay off your loan at current rates.

That means the only people who should overpay on their student loans are super high earners who are likely to clear their loans before they’re wiped. If that’s you, you should definitely consider overpaying since the longer the debt is running, the more interest you’ll pay, and the interest isn’t cheap.

Those figures are based on borrowing ?9,250 for fees and ?8,944 living costs per year, which works out at ?54,582 in total. If you borrowed substantially less than that, for instance because you lived at home, then you may want to consider early repayments as you will be more likely to pay off the full amount with interest within 30 years.

You can find out how much you owe on the Student Loans Company website . Look at your payslips and see how much you’re paying each month. Multiply that by the number of months you have left before the debt is cleared to get a sense of whether you’ll pay your full loan off. Think about your salary expectations and whether your income payday loans Farmerville will rise sharply. If you think you’re going to be a high earner, extra early repayments are worth considering.

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