10,000s risk wasting money by choosing to repay their student loan when they don't have to
Tens of thousands of university leavers risk wasting big money – in some cases over £20,000 – by voluntarily paying off their student loan even though the amount they earn means they don't need to, MoneySavingExpert.com can reveal.
Student loans only have to be repaid when you earn over a certain amount – what's known as the 'repayment threshold'. But figures we've obtained under the Freedom of Information Act show that in the 2016/17 financial year alone, more than 30,000 people chose to make student loan repayments when they were earning LESS than the repayment threshold.
In many cases, those who have made voluntary repayments will have paid money they would not have otherwise had to, because:
- If you started uni in/after 2012 and are from England or Wales (ie, you're on a 'Plan 2' loan), you'll likely NEVER pay back your loan in full. This is because your loan is wiped after 30 years if you've not repaid it by then – and it's predicted 83% of these graduates won't have. See full Plan 2 loan help below.
- If you started uni between 1998 and 2012 or since if you're from Scotland or Northern Ireland (ie, you're on a 'Plan 1' loan), you'd probably be better off saving the cash. The interest rate for these loans is currently 1.75%, less than you can earn in a decent savings account. See full Plan 1 loan help below.
Some who chose to pay back when they didn't need to have told us they now feel "stupid" for having done so, and regret it.
Wondering if you should repay your student loan? See full help in Martin's Should I repay my student loan? guide if you have a Plan 1 loan, or the Should I panic or pay it off? guide if you have a Plan 2 loan.
'For some, overpaying is just flushing money down the loo'
Martin Lewis, founder of MoneySavingExpert.com, said: "In practice, for most people student loan repayments act far more like a tax than a debt.
"With interest rates for those who started uni in or after 2012 as high as 6.3%, some may assume repaying as much as you can is a boon. Yet the stats show the huge majority – over 80% – of these university leavers are unlikely to clear their loan in full in the 30 years before it's wiped, so that interest rate isn't what they'll pay. For those on lower earnings, overpaying some of your loan is often futile as it won't alter what you repay in future – in which case overpaying is just flushing money down the loo.
"For those who started university before that (or those from Scotland or Northern Ireland since) as both the amount borrowed and the interest rates are lower, you are more likely to clear all the debt before the loan's wiped.
"But the interest rate is lower – only 1.75% – so if you've cash spare to make voluntary payments, there are usually better ways to use it. Clear other debts first, and consider putting extra cash in a savings account to prevent future borrowing. After all, you can earn more there than the interest is costing you – up to 2.6%."
The figures we've received from the Student Loans Company (SLC) show that in 2016/17, the first year that Plan 2 graduates were out of university, 13,000 people opted to pay back part of their loans when they were earning under £21,000, the minimum amount they had to earn for them to have to repay. And hundreds of these made huge repayments, some in excess of £20,000.
Researchers estimate only 17% of those on Plan 2 loans will actually end up repaying their loans in full before they're wiped after 30 years. So many of these university leavers could be volunteering money they'd otherwise NEVER have to pay, and therefore have essentially wasted the cash.
Here's what the figures uncovered by our FOI request show:
It's worth noting that these figures don't include those earning over the repayment threshold who may also be voluntarily paying more than they need to.
These figures also DON'T include those who repay their student loans early via their salary – ie, those who have payments taken before the April after they graduate, which is when repayments have to start. We covered this separate issue last year in our MSE News story: 100,000+ university leavers repaying their student loan too soon.
Our Freedom of Information request also shows that more than 18,000 people on Plan 1 loans are repaying voluntarily each year while earning less than the repayment threshold. (The threshold for these changes each year – it's currently £18,935.)
Those with Plan 1 loans are more likely than those on Plan 2 loans to end up repaying in full, though there aren't reliable estimates for exactly how many will. But even if those on Plan 1 loans are repaying money they'd later end up paying via their salary, they may be making a mistake. If you have cash spare, there are better ways to use it.
The interest rate for those on Plan 1 loans is currently 1.75%, and it's been even lower previously. So if you have a pile of spare cash you're thinking of throwing at your student loan, you could be better off putting it in a savings account instead, where you'd get a return of up to 2.6%. See Top Savings Accounts for full info.
Our Freedom of Information data can be found below:
We've heard from several graduates and parents of graduates who opted to pay back their student loan voluntarily over the past few years, not realising they might never have to pay the whole loan off, who now wish they hadn't.
- One MSE user's mum, who asked not to be named, told us she regretted repaying £20,000 towards the student loan of her son, who studied at the University of St Andrews in Scotland between 2006 and 2010.
She said: "I thought everyone would have to pay off their loans and we didn't want him starting out in life with this hanging over him. We had a windfall and decided to pay his loan off. Every time I hear now that relatively few students will ever pay off their loans, it makes me angry. It's very unfair. I feel very stupid.
"Had he kept the £20,000 and put it in the bank he could have used it to help buy a home. We thought we were doing the right thing. I regret it now."
- Another MSE user, David, who studied at a Welsh university between 2006 and 2009, is autistic and has several disabilities. He took out a student loan to cover tuition fees and living costs, but didn't spend much while at university because he lived at home.
His mum opted to pay back almost £17,000 towards his student loan several years after graduating, but then began to wonder if she had made the right decision.
She told MoneySavingExpert: "The likelihood of David being able to get a job is very, very slight. Paying it back was straightforward. We didn't think much of it at the time.
"Later, when we started reading stories about student loans and how many students don't pay theirs back, I began to question whether we should have repaid."
David added: "There was no guidance whatsoever from the Student Loans Company or anyone else on whether paying back my student loan was a good idea or not."
- A third MSE user told us: "I paid a large student loan off a few years ago as they were bothering me with letters and threats of high-interest payments if I didn't pay it.
"I took a loan out and paid my loan off. Problem is, I have only worked part time and never earned over the threshold required to pay any student loan at all.
"I called them up to enquire about getting my money back, but they advised me that because I paid my student loan 'voluntarily' I was not entitled to it back."
Who has to repay their student loan?
Regardless of how much you earn, you should only start repayments from the April after you leave your course at the earliest. After that, the amount you repay depends on what you earn, where you're from and when you started your studies:
- On a Plan 2 loan? You repay 9% on everything above the repayment threshold of £25,725 in the 2019/20 tax year – what counts though is how often you're paid, so you repay when your earnings go over the weekly or monthly equivalent of this threshold. If you don't clear your loan in 30 years, it's wiped.
- On a Plan 1 loan? You repay 9% on everything you earn over the current threshold, £18,935. Again, how often you're paid is crucial – you repay when your earnings go over the weekly or monthly equivalent of the threshold. Your loan is cleared a certain amount of time after you leave university, but it depends on various factors. Full info on this can be found on the SLC website.
Unless you're self-employed, student loans are paid back from your wages via the pay-as-you-earn (PAYE) system – alongside tax and national insurance – if you earn over the relevant threshold. If you're self-employed, the taxman works out how much you should pay, and you pay it when you settle your tax bill.
If you wish to make a voluntary student loan repayment, the process is explained on the SLC website. However, consider if it's the best option for you, for the reasons outlined above. See full help in Martin's Should I repay my student loan? guide if you have a Plan 1 loan, or Should I panic or pay it off? if you have a Plan 2 loan.
Remember as well, if you do make voluntary repayments, you won't be able to ask for the money back later.
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