Should I repay my student loan?

Or is it better to save or clear debt?

It's a simple question spilling from the lips of over four million former graduates. "If I've got extra cash, should I pay off my student loan?"

The answer depends on whether you've other debts and when you studied, as that dictates whether your interest rate is 3.3% or 1.75%.

This easy-to-follow guide is for any student who started uni before 2012, and Scottish and Northern Irish students starting since then (if you’re an English or Welsh student who started in or after 2012, see the link below). We'll speedily take you through how to work out your situation, how you're affected and answer the key 'should I pay it off?' question. 

Step 1: Check YOUR student loan type

A whole generation of Brits now have student loans. Anyone who started higher education since 1990 has been eligible – so even those who graduated 25 years ago could still have them.

Sadly many of these millions of people have had little, if any, education on these matters – for loads more info on how this can be rectified, see the full Financial Education Campaign section.

The way student loans work varies radically depending on WHEN you started higher education.

Click tab for info about your loan type... Looking for information about 2012+ loans in England & Wales? Martin's written a new guide specific to your loans...

Who has them? Everyone who started higher education between 1998 and 2011, and Scottish and Northern Irish students starting after 2012.

Loan type: 'Income-contingent' loans, known as 'Plan 1' Loans by the Student Loans Company (SLC)

Current interest rate: 1.75%

How the interest rate is set: The interest rate is the LOWER of the following:

Either... the Bank of England base rate, plus 1%...

Or... the rate of inflation. This is fixed for a year on 1 September based on the rate of inflation (RPI measure) from the previous March, though the actual rate is only officially confirmed each August.

March 2018's inflation rate was 3.3%, but currently, the base rate + 1% cap still applies, so the rate for the 2018/19 academic year will be 1.75%. 

If you're new to interest rates see our Interest Rates Beginner's Guide.

How much will you repay? You repay 9% of everything earned above £18,330 a year. So earn £19,000 and you'll repay £60 a year; earn £30,000 and it's £1,050 a year.

If you earn under the threshold but a bonus or overtime earnings pushes you over the £1,528 monthly limit, a repayment WILL be deducted that month. You can claim it back from the Student Loans Company (SLC) at the end of the tax year if your P60 shows total earnings were under £18,330.

The income threshold is set to increase to £18,935 from 6 April 2019. 

How you actually pay it:

For employees: The money is taken automatically from the payroll in the same way as tax (so it never goes in your pocket and there are no debt collectors).

If your salary's over £18,330 and repayments aren't being deducted, it's YOUR responsibility to tell your employer. Keep evidence of doing this as, if it doesn't start deducting repayments after you've asked, the possible fine of £1,000s will be your employer's to pay.

Repayments are given to HM Revenue & Customs (HMRC), which then pays the SLC every March. The SLC applies repayments as if it had received them monthly, so you don't pay more interest than necessary (but it doesn't look like that throughout the year).

For the self-employed/ those with other income: If you are self-employed, you are responsible for notifying HMRC of payments when you do your self-assessment form.

If you have additional income of £2,000+ from savings interest, pensions or shares and dividends, this will also be treated as part of your income for repayment purposes and you'll need to repay 9% of that, again via self-assessment.

For those living overseas: You'll pay 9% of the amount you earn over the relevant threshold for the country you're living in. See more info on repaying from overseas and the Student Loan's Company's income threshold table.

Have you nearly paid the loan off? If so, give the SLC a call on 0300 100 0611 – or it may continue taking payments past the point that you have cleared the debts. This is because it only assesses your balance once a year, each March.

If you are nearing full repayment, you have the option to leave the PAYE scheme and make monthly payments by direct debit instead. For full details on this, and how to get money back if you've already overpaid, read our news story about £45m in student loan overpayments.

The impact on credit scores: None whatsoever. This type of student loan is not included on your credit report. However, when applying for a product you may be asked whether you have loans. Plus the fact your take-home pay is reduced may be taken into account (see the Credit Rating guide too).

Can I defer payment? No – but you only repay if you are earning above £18,330. Other thresholds apply if you live overseas - see the Student Loans Company's table.

How to overpay: You can make a payment any time you wish, by card, cheque or bank transfer. See the Student Loans Company payments page for details.

Any changes due? In general, no.

However those on 'post-1998' loans see their repayment threshold (how much you need to earn before you start paying) increase with inflation annually (based on the RPI inflation rate in the March the year before).

This means you will pay LESS back each year (unless you have pay rises each year), extending the loan's life and potentially the total cost – but giving you more disposable income.

The Government is selling off the remaining £40bn of student loan debt it has (which includes these loans). It says this will not affect the terms of the loans, but it's important to understand the Government can change rules made in the past. For more info see the Student loan sell-off – news story.

Who has them? Those who started higher education between 1990 and 1997.

Loan type: Old style 'mortgage' type

Current interest rate: 3.3% on 1 September 2018.

How the interest rate is set: It is set for a year every September based on the rate of Retail Prices Index (RPI) inflation from the previous March – though the actual rate is only officially confirmed each August. March 2018's inflation rate was 3.3%, so this is the rate for the 2018/19 academic year (If you are new to interest rates read our Beginner's Guide to Interest Rates.)

How you repay: You must make repayments if you earn over £29,219 per year – though you can pay before that, if you wish. The threshold is increasing to £30,737 per year from 6 April 2019.

How you actually pay it: All these loans have been sold to private companies, but you are responsible for paying it directly to whichever company administers your loan, by direct debit, card, or cheque. This Student Loans Company (SLC) page has details for the three companies now collecting the loans.

The impact on credit scores: While having the loan itself doesn't impact your score, it can have a substantial impact if you're a late payer or miss a repayment.

The SLC will write to all late payers, giving 28 days to make contact or it will go on their credit report (see the Credit Rating guide).

Can I defer payment? Yes, if you earn under £29,219. You need to write to the debt management company administering your loan once a year to do so, supplying particular documents – see Erudio Student LoansThesis Servicing or Honours Student Loans for further information on how to defer.

Are there any penalties for repaying early/overpaying? No.

How to overpay: Make an extra payment any time you wish, by card, cheque or bank transfer; contact your debt administrator to make the payment.

Any changes due? No, not to the way you repay. Much like when the 1998 changes happened, the system you're on won't change. However, the Government has sold all the remaining £900 million of student loans taken out between 1990 and 1998, so you'll make repayments to a different company.

Step 2: Why student loans are different

There are three key facts that make student loans unlike any other form of borrowing. Without understanding these, you can't make a rational decision.

  1. They have no 'real cost' of borrowing

    This is something often said, but it's worth thinking about what it really means. This applies to both pre-1998 and post-1998 loans, but sadly NOT new starters from 2012 onwards (see Martin's new student loan guide for more on that).

    There's no 'real' interest cost because the most you'll pay is the rate of inflation – the rate at which prices are rising.

    Inflation is the rate at which prices rise. Therefore if, as is usual, inflation is positive, then something costing £100 this year will on average cost more next year. For example, at 4% inflation it will cost £104 next year. Now look at the impact of this on the loan:

    Why Irma Scholar pays no real interest

    New student Irma Scholar needs a £1,000 student loan, enough to buy her 20 trips to the supermarket. The loan interest rate is set at the rate of inflation, which over the next ten years averages 4%. To help keep this example simple, Irma decides to repay it all at once in 10 years' time, having never repaid a penny before.

    The 4% annual increases mean she must pay back £1,480. This sounds like it's expensive. Yet everything else has gone up by the same proportion too: wages and the price of goods. So in 10 years' time £1,480 still buys Irma roughly the same 20 supermarket trips' worth of goods.

    In other words, the borrowing hasn't diminished her spending power. She borrowed 20 shopping baskets' worth and repaid 20 shopping baskets' worth.

    This is completely different to all other forms of commercial borrowing, where not only do you pay back the '20 trips to the supermarket', but also actual cash on top – and over the years the amount of extra cash you pay can add up to £1,000s.

    In fact for some student loan borrowers, the actual amount owed has SHRUNK in the past due to negative inflation.

    • Current and past student loan interest rates

      LOAN TYPE DATE RATE
      Post-2012 loans 1 Sep 18 to 31 Aug 19 3.3%-6.3%
      Post-1998 loans 1 Sep 18 to 31 Aug 19 1.75%
      Pre-1998 loans 1 Sep 18 to 31 Aug 19 3.3%
      Post-2012 loans 1 Sep 17 to 31 Aug 18 3.1%-6.1%
      Post-1998 loans 1 Dec 17 to 31 Aug 18 1.5%
      Post-1998 loans 1 Sep 17 to 30 Nov 17 1.25%
      Pre-1998 loans 1 Sep 17 to 31 Aug 18 3.1%
      Post-2012 loans 1 Sep 16 to 31 Aug 17 1.6%-4.6%
      Post-1998 loans 1 Sep 16 to 31 Aug 17 1.25%
      Pre-1998 loans 1 Sep 16 to 31 Aug 17 1.6%
      Post-1998 loans 1 Sep 15 to 31 Aug 16 0.9%
      Pre-1998 loans 1 Sep 15 to 31 Aug 16 0.9%
      Post-1998 loans 1 Sep 14 to 31 Aug 15 1.5%
      Pre-1998 loans 1 Sep 14 to 31 Aug 15 2.5%
      Post-1998 loans 1 Sep 13 to 31 Aug 14 1.5%
      Pre-1998 loans 1 Sep 13 to 31 Aug 14 3.3%
      Post-1998 loans 1 Sep 12 to 31 Aug 13 1.5%
      Pre-1998 loans 1 Sep 12 to 31 Aug 13 3.6%
      Post-1998 loans 1 Sep 11 to 31 Aug 12 1.5%
      Pre-1998 loans 1 Sep 11 to 31 Aug 12 5.3%
      Post-1998 loans 1 Sep 10 to 31 Aug 11 1.5%
      Pre-1998 loans 1 Sep 10 to 31 Aug 11 4.4%
      Post-1998 loans 1 Sep 09 to 31 Aug 10 0%
      Pre-1998 loans 1 Sep 09 to 31 Aug 10 -0.4%
      Post-1998 loans 6 Mar 09 to 31 Aug 09 1.5%
      Post-1998 loans 6 Feb 09 to 5 Mar 09 2.0%
      Post-1998 loans 9 Jan 09 to 5 Feb 09 2.5%
      Post-1998 loans 5 Dec 08 to 8 Jan 09 3.0%
      Post-1998 loans 1 Sep 08 to 4 Dec 08 3.8%
      Pre-1998 loans 1 Sep 08 to 31 Aug 09 3.8%
      All loans 1 Sep 07 to 31 Aug 08 4.8%
      All loans 1 Sep 06 to 31 Aug 07 2.4%
      All loans 1 Sep 05 to 31 Aug 06 3.2%

    Of course the system isn't perfect, as inflation moves throughout the year but your repayment rate is fixed annually – yet over time this balances out.

  2. If you don't earn enough, you don't need to repay

    Unlike normal borrowing, which requires payment regardless of your situation, with student loans you don't need to repay them unless you're earning over a set amount. This applies even if you have started paying and then your income drops.

    This is crucial for deciding whether to repay. Firstly, it means if times get tough – you lose your job or your income drops – then unlike any other lenders, the student loan company won't come knocking on your door. You quite simply don't need to repay.

    Plus while it may feel like interest is being added if you stop repaying and you see the amount you owe increase, there is no 'real' impact on your pocket because it is set at the rate of inflation.

    • You have a contractual relationship with the UK Government (via the SLC) to repay your student loan. If at any time you move abroad, you're expected to inform the SLC so you can make repayments directly to it (usually by direct debit).

      Different repayment thresholds apply in different countries, depending on their national average earnings and typical living costs, so you must provide details of your new salary (see the SLC website's country-by-country details).

      If you're on the pre-1998 loan repayment scheme, and live overseas, you'll be expected to pay back once you're earning the equivalent of £29,219. See the Student Loans Repayment website for details of how to repay.

      Repayments will be deducted in pounds sterling and you'll be responsible for any costs involved in converting the currency.

      There are severe penalties if you move overseas and don't tell the SLC, or don't provide the information it requests so it can deduct repayments from your salary. Penalties include applying repayments based on an income equal to twice the UK average earnings, and even – in the most extreme cases – demanding you repay the total loan in one go.

      Of course for those in some jurisdictions there are questions of how this will be enforced, but that issue is similar to any cross-border contract.

  3. The debt is wiped after 30 years (ish) or if you die

    Student loans only have a fixed life, though the exact time depends on which loan you have (see chart below). It's also important to note that if you die the debt is wiped. While this may seem obvious, it means it doesn't form part of your estate (ie, isn't passed on to dependants), unlike other forms of debts. The same is true if you become permanently unfit to work.

    This is an important fact to consider in your deliberations. It means there is a chance that after you overpay, you may then stop earning over the threshold, die or be incapacitated, so will have unnecessarily repaid debt that you didn't need to. While hopefully this is unlikely for most, it is worth considering.

    Equally, if it's unlikely you'll clear the loan in time then you will have paid unnecessarily.

    The chart below shows you exactly when your loan would be wiped...

    When are outstanding loans wiped?

    HIGHER EDUCATION START DATE AGE AT WHICH LOAN IS WIPED DEATH UNFITNESS TO WORK
    1990 - 1997 
    (If aged under 40) (1)
    Earlier of 25 years after your first payment of your last loan agreement (usually the start of your final year), or when you reach age 50
    1990 - 1997 
    (If aged 40+) (1)
    When you reach age 60
    1998 - 2005 (1998 - 2006 in Scotland) When you reach age 65
    2006 - 2011 25 years from the first April after graduation (when you were first due to repay)
    2007 - 2011
    (Scottish residents)
    35 years from the first April after graduation (when you were first due to repay)
    2012+ England & Wales: 30 years from the first April after graduation (when you were first due to repay) 

    Scotland: 35 years from the first April of graduation (when you were first due to repay)

    NI: 25 years from the first April of graduation (when you were first due to repay)

    (1) This is the age that you were when your last agreement for a loan was made – usually your last year of study.

    From December 2018, Scottish students who started university after 1998 will see their debt wiped after a maximum of 30 years.

    There are currently two rules depending on when you started university:

    • If you started university between 1998 and 2006 – your loan is currently wiped when you reach 65.
    • If you started university after 2006 – your loan is currently wiped 35 years following the April after you graduated.

    But from December, the new rules will apply:

    • If you started university between 1998 and 2006 – your loan will be wiped when you reach 65 or 30 years from the April after you graduated – whichever is sooner.
    • If you started university after 2006 – your loan will be wiped 30 years following the April after you graduated.

    See our MSE News story for more detail.

Step 3: Pay off other debts first

There is a golden rule for anyone with multiple debts:

Always focus on paying off the highest interest rate debts first.

The reason for this is simple. The higher the interest the quicker the debt grows, so you want to get rid of it as soon as possible (see the Pay Off Debts With Savings and Should I Pay Off My Mortgage? guides for a full explanation).

With student loan interest rates at 3.3% or 1.75%, it's unlikely most other debts – whether credit cards, loans or hire purchase – are costing you less, so always pay those off before even contemplating touching your student loan.

The exceptions

Of course there will be some out there saying "yes, but...". So let's briefly run through the big buts...

  • With some loans there may be early redemption penalties for clearing debts early – this can mean they are prohibitively expensive to clear. In that case if you have spare cash and only these debts, you should follow the logic of someone who is debt-free.

    However if the penalties only last for a short time (as with a mortgage) then it is worth considering putting the money aside for the short term in savings until you can clear these debts without paying a penalty.

  • Here your interest rate is lower than the student loan rate – so on pure maths you should clear the student loan ahead of these.

    Yet with 0% credit cards, after a time the rate shoots up unless you do a balance transfer; so the advantage is only short term unless you have a very good credit score. With tracker mortgages, there is no guarantee the base rate will stay low for a long time.

    So if the debt is likely to last over the longer term, when rates could jump, a student loan is likely to be a safer bet to remain relatively cheap. Plus it has the added bonus that if your income were to drop severely, you'd still have to find the money to meet card, loan or mortgage debts, but not your student loan. So it's a fine balance.

Step 4: Debt-free – better to repay than save?

Many students with spare cash who can afford to clear the debt or overpay ask this question, but in short for most students with post-1998 loans the answer is...

No, No and No!

Surprisingly, many bright graduates say: "It's not costing me much, so I'm going to pay it off". This logic's topsy-turvy.

A loan this cheap shouldn't be paid off more quickly than is necessary for two reasons.

Reason 1: You may be able to earn more saving than the loan costs

Quite simply for most, the interest you can earn in a top bank account outstrips the cost of student loans for basic-rate taxpayers - though often these only let you save a small amount in them.

From April 2016 this became even more beneficial as all savings accounts now give you all the interest without tax taken off under the personal savings allowance.

So you're probably better off saving any excess cash you've got rather than repaying the debt. Here's an example...

Recent graduate Ivor Gudjob has £10,000 of student loan debt at 1.5% interest. He's debt-free and has £5,000 saved up. His choices are putting the money towards his loan, or saving it in a top bank account(s) at up to 3%.

Easy calculations show that repaying the loan saves him £75 a year but saving earns him £148 a year so he's £73 better off. It's a no-brainer!

In fact the equation is quite simple – if you can EARN more from savings (after tax) than the loan is costing you, then you're better off saving.

Of course, with the introduction of the Personal Saving's Allowance, most people won't pay taxes on their savings anyway. You're allowed to earn up to £1,000 interest tax-free per year on your savings if you're a basic rate tax payer, and up to £500 per year if you're a higher rate tax payer. See our Personal Savings Allowance guide for more information.

Rate savings must pay to beat repaying student loan

TABLE_CELL_STYLE TAX-FREE SAVINGS TAXED SAVINGS
(BASIC 20% RATE TAX)
TAXED SAVINGS
(HIGHER 40% RATE TAX)
2TAXED SAVINGS
(TOP 45% RATE TAX)
Post 1998 loan (1.75%) 1.75% 2.2% 2.9% 3.2%
Pre 1998 loan (3.3%) 3.3% 4.1% 5.5% 6%

If you can't beat the loan rate with savings, you could consider simply bunging any spare cash at it, but read reason 2 first.

Reason 2: Avoid having to borrow back at higher rates

For ALL loan holders, there is an incredibly important additional reason...

By paying it off early, you risk needing more expensive borrowing from elsewhere later.

You might have no debts right now. But it's possible you will have in future, perhaps as a mortgage, for a car or to set up a new business.

By paying off your student loan quicker than necessary, rather than saving, you may find yourself replacing it in a few months or years with a much more expensive commercial loan. After all, even a mortgage over the long run costs more than a student loan. Plus student loan debt has the safety that it needn't be repaid if your income drops.

Student loan debt doesn't cost anywhere near as much as commercial interest. If future borrowing's likely, consider building up your savings now, rather than speeding up student loan repayments, so that you need to borrow less from the bank in future.

Reason 3: You can put the cash to better use

If you've a decent chunk of cash, and your options are to pay off your student loan or to save for a mortgage, nine times out of 10 you should go for the deposit.

"But," I hear you cry, "won't having a student loan prevent me from getting a mortgage anyway?"

Well, no, it won't. It may mean you can borrow slightly less, as you're making student loan repayments, but these have always been taken into account – as have any other loan or credit card commitments.

Student loans don't show up on your credit record – but the lender will ask on your application form if you have any loans or are making debt repayments. It'll also ask for your payslips, where your student loan repayments will show up.

Getting on the housing ladder's difficult enough. Unless you've a very good reason, you're best putting any spare chunks of cash towards a deposit than you are using it to pay back one of the cheapest loans you're ever going to be able to get.

Those with no self-control, be careful...

This guide is written from a financial, not an emotional, perspective. Based on the maths, only those with pre-1998 loans who definitely won't need to borrow should be racing to repay their student loans.

Yet for those who've been badly burned by debt, or have no self-control, sometimes it's best to ignore the sums and do what you feel comfortable with. If you'll just end up spending or wasting the cash, then at least overpaying the student loan is playing it safe. It's far better than ignoring the fact you've no self-control or frivolously building up more borrowing.

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