Plan 1 student loan repayment: England & Wales (1998-2011) and Northern Ireland
Is it better to save or pay it off?
Updated 4 September 2024
Over 2.5m English and Welsh students who started uni before August 2012, and Northern Irish students who started since 1998 are currently paying back their Plan 1 student loans. But the simple question of whether you should pay off your student loan early if you've got extra cash, depends on whether or not you've other debts.
A whole generation of Brits now have student loans. Sadly many of these millions of people have had little, if any, education on what having one means for them financially in the long-term. This easy-to-follow guide will help students with a Plan 1 loan to speedily work out your situation, how you're affected and answer the key 'should I pay it off early' question.
English or Welsh student who started university in 2012 or later? This guide isn't for you. See Martin's 'Student interest's now 7.3%' guide.
If you're from Scotland. You can find all the need to know about Plan 4 student loan repayment in our new Scottish student loan repayments guide.
This guide only covers official Student Loans Company (SLC) loans, not Personal, Career Development or professional studies loans. For those, see our Pay off debts with savings? guide.
Some of the figures mentioned in this video have changed since the video was made. The following figures are the rates and thresholds for 2024:
- From April 2021, Plan 1 was replaced by Plan 4 for Scottish students
- Plan 1 graduates repay 9% of everything they earn over £24,990
- Bank of England base rate (as of September 2024) is 5%
- The current rate of interest (as of September 2024) is 4.3%
- The current rate of inflation (as of March 2024) is 4.3%
Martin Lewis explains whether you should pay off your Plan 1 student loan
Embedded YouTube Video
Five plan 1 loan repayment need-to-knows
All English and Welsh students who started higher education between 1998 and 2011, and Northern Irish students starting since 1998 will have a plan 1 student loan.
1. The interest rate is set every year
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 Retail Prices Index (RPI) measure from the previous March, though the actual rate is only officially confirmed each August.
March 2024's inflation rate was 4.3%. As this is lower than the Bank Base Rate +1%, the interest rate is set at RPI (4.3%). If you're new to interest rates, see our Interest rates beginner's guide.
2. You only repay if you earn over £24,990/year
Student loans are 'income contingent' loans. You repay 9% of everything earned above £24,990 a year (though more accurately it's 9% of anything over £2,082 per month). So earn £26,000 and you'll repay £90 a year; earn £30,000 and it's £541 a year.
If you earn under the threshold for the year, but a bonus or overtime earnings pushes you over the £2,082 monthly limit, a repayment WILL be deducted that month. You can claim it back from the SLC at the end of the tax year if your P60 shows total earnings were under £24,990.
It's not possible to defer repayments if you're earning over the repayment threshold.
Got a maintenance loan from Student Finance Wales since 2010/11? The Student finance partial cancellation scheme means you may be due up to a £1,500 reduction. Students with a maintenance loan for a full-time undergraduate course from 2010/11 or later, with no outstanding charges, costs, expenses or penalties, may be eligible for up to a £1,500 reduction on the loan. The money will automatically be deducted from your loan balance once you've made your first repayment (voluntary or through PAYE).
The best way to maximise this is as soon as you've received at least £1,500 in a maintenance loan, make a one-off voluntary repayment of £5 (that's the minimum). That way, you'll reduce your loan balance and in turn the interest will be lower. Find out more here.
3. How you make repayments depends on whether you're employed or self-employed
If you're employed: 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 £24,990 a year 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).
If you're self-employed/have 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.
If you're 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 SLC's income threshold table.
You can make additional payments any time you wish, by card, cheque or bank transfer. See the SLC payments page for details.
4. If you've nearly paid off your loan call SLC
If you've nearly paid off your loan give the SLC a call on 0300 100 0611 (for Wales it's 0300 100 0370) – or it may continue taking payments past the point that you have cleared your debt.
When you've less than two years left of loan repayments, you have the option to leave the PAYE scheme and make monthly payments by direct debit instead. You can do this either by logging into your SLC account or by calling the SLC.
If you haven't switched to direct debit by the time you've 12 months left of your loan repayments, the SLC will write to you to let you know and encourage you to set up a direct debit. For full details on this, and how to get money back if you've already overpaid, read our Student loan overpayments guide.
5. The repayment threshold increases annually
The repayment threshold (how much you need to earn before you start paying) increases every year - usually based on the RPI inflation rate in March the year before.
This means if you continue to earn the same salary, you'll pay LESS back each year, extending the loan's life - and therefore adding more interest (but it will give you more disposable income in the short-term).
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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 on whether you should be paying it back early.
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 student loans pre-2012 (see Martin's Plan 2 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 10 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 - but that hasn't happened recently.
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 have 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.
3. The debt is wiped after 25 years, 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 (meaning it 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 | Unfit to work |
|---|---|---|---|
| 1998-2005 | When you reach age 65
|
 |
|
| 2006-2011 | 25 years from the first April after graduation (when you were first due to repay) | |
|
Is there any impact on my credit score?
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).
Your student loan won't be written off if you have certain debts. Student loan debts aren't included within a bankruptcy, debt relief order (DRO) or individual voluntary arrangement (IVA) so they're not written off with your other debts at the end of the term. This means any outstanding student loan you have is still repayable.
The only time this isn't the case, is if you had an IVA approved before 6 April 2010. In which case, your student loan would be included in the IVA and so it would be wiped at the end of the agreement.
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Got other debts? Pay off debts with higher interest first
If you've read all of the above and are still considering paying off your student loan early, there is a golden rule for anyone with multiple debts.
Put simply – 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 4.3%, 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...
Debt-free? Don't repay over saving
Many students with spare cash who can afford to clear the debt or overpay ask whether it is better to repay or save. In short for most students with post-1998 loans the answer is...
NO, NO, 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
For most the interest you can earn in savings outstrips the cost of student loans.
Graduate Ivor Gudjob has £10,000 of student loan debt at 3.25% interest. He's debt-free and has £5,000 saved up. His choices are putting the money towards his loan, or saving it in an account paying 4.35%.
Easy calculations show that repaying the loan saves him £162.50 a year, but saving earns him £217.50 a year, so he's better off saving.
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.
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. 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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