Providing you have the funds available, anyone can pay off their loan in full at any point. However, for many reasons, not least the sheer cost, Student Finance is typically paid back in compulsory monthly payments taken from your payroll based on your income. Usually, this is done until your loan terminates and anything that remains is wiped, but in some cases, the monthly payments can cover the loan before the termination date. In this scenario, it may be worthwhile to consider making overpayments on your loan to pay it down faster and reduce the amount of interest accrued. In this article, we want to discuss this in more detail, specifically how you can identify if this situation applies to you what this means in terms of making overpayments and by how much.

Should I pay back my student loan?

When considering whether you should be paying back your loan with overpayments, you need to know if you are going to pay back your loan in full. This is important because if you have any debt remaining in your account when your loan is wiped, even 1p, then any overpayments you have made up to that point is lost money. It can be helpful to know if you are going to pay your loan back without any overpayments as this is a strong indicator that there are savings to be made via overpayments.

Let's consider a recent graduate called Dave. He has £50,000 of student debt and has 360 months (30 years) left to pay it back. He started work the same year he graduated and his current income means that his payments are £50 a month. For simplicity, in this example, his repayments don't increase. By month 360 Dave will have paid back £18,000 and the remaining £32,000 plus any interest is wiped and therefore is not scheduled to pay back his loan. If Dave made an extra £50 a month payment for those 360 months he would have doubled the amount he has paid to £36,000. The result of both scenarios is that Dave's debt is wiped clean but in the second scenario he is £18,000 worse off. Now let's consider Dave was to aggressively pay off his loan with £1,000 extra a month. He would now be paying off the loan in 50 months (50 x £1,000 = £50,000) and be debt-free for the remaining 250 months. Even though he will be debt-free for longer and won't need to make any Student Loan repayments he will have paid £50,000 as opposed to the original £18,000 and be 32,000 worse off than if he did nothing.

Will I pay back my student loan?

There are 5 main factors that determine if you will pay back your loan. These are your income, wage growth, remaining debt, payback period and interest rates.

Income

Your income determines how much you are obligated to repay each month depending on your plan (usually 9% on anything over a threhsold). Therefore, it stands to reason that higher earners are more likely to repay their loans. The amount of income required is dependent on the other 4 factors. To provide some context let's revisit Dave's case using some assumed averages. We have assumed a wage growth of 4%, inflation of 2% and a loan interest rate of 5%.

In Dave's case a starting salary of around £43,000 would be needed to pay back his loan and interest accrued over the loans 30 years. If he earned over this he would increase his chances of paying back his loan and may even do it ahead of schedule. Any lower and he would likely have remaining debt to wipe.

Wage Growth

Throughout your career, your income will trend upwards because of promotions, pay rises, moving jobs or because of systemic wage inflation. This can happen at varying rates but when stretched over a longer time frame you can get a better estimation of an average wage growth. We suggest 4% per annum as an average, however, certain careers such as doctors have a higher pay ceiling than others. Since this is directly impacting your income this comes with the same considerations. A tiny change in wage growth can have a profound impact on your chances of paying your loan down. Additionally, in the real world, wage growth is staggered and unpredictable. One year might be 6%, the next 3% and the one after 2% which also impacts the overall chances of repaying your loan. Let's go back to Dave.

For whatever reason, Dave thinks he will have lower wage growth than before, around 3%. If this were the case, instead of having no debt and paying off his loan as he would with 4% wage growth, his debt would have actually increased! For context, the remaining debt would come to around £66,000 but remember, this would ultimately be wiped. Dave is far less likely to pay off his loan in this scenario. Conversely, if Dave had a 5% wage growth, he would pay back his loan much earlier, 6 years early! If Dave were to receive the bulk of his wage growth in the earlier stages of his career, he would increase his income earlier, increasing his monthly payments and thus pay back his loan earlier. More likely is that Dave receives a yearly pay rise, subsequently meaning that his repayments will only go up once a year making it far less likely that he will pay it back.

Remaining Debt

The amount of remaining debt directly impacts the possibility of you fully repaying that debt. Simply, a lower outstanding balance translates to fewer and smaller repayments and a greater possibility of paying back your loan.

Let's consider Dave now has £25,000 of student debt instead of £45,600. If this was the case the income needed to pay back your loan drops to £34,100 as opposed to the previous £44,800. Conversely, if he had £65,000 of student debt his income requirements increase to £54,900. If Dave had a much larger student debt, £125,000 for example, he would need an income of £86,000 to be squeduled to pay back his loan.

Payback Period

Determined by the repayment plan you are on, the remaining length of your payback period influences the potential for full repayment. The timer starts in the following April after graduation regardless of whether you have been working or not. A longer payback period allows for more gradual repayment, potentially increasing the chances of clearing the debt entirely, especially if your monthly payments cover any interest. Conversely, a shorter payback period may make a full repayment impractical or unattainable. Imagine you only had 1 day remaining to pay back your loan, it should be fairly obvious that you would just wait the day and let the remaining debt be cleared, however in the case of plan 5 loanees with repayments spanning 40 years, you would gain much more by paying off your debt earlier.

If Dave were on Plan 5 instead of Plan 2 then he would have a 40-year payback period from graduation. This would decrease the income required to £37,300 for Dave to pay back his loan. This is thanks to Dave's wage having much more time to grow and his monthly payments getting large enough to overcome the debt. Alternatively, if Dave didn't start earning over the threshold until 30 years into his career, he would have 10 years left to make payments. Even if the loan didn't accrue interest in this period, he would need a substantially higher income to be able to pay off the loan before the wipe date.

Interest Rates

Interest rates are the cost of borrowing and are added to the outstanding debt. As your total debt increases, so do your interest accruals, increasing your total debt, increasing your interest accruals, and so on. Therefore, a higher interest rate means a greater increase and a lower rate means a smaller increase, this also compounds (snowballs). Similar to wage growth, interest rates are impacted by frequency and how they are distributed. Student loan rates have and will continue to fluctuate and can be found on the government website per your plan. For this reason, it's better to use an average of the past rates. To further confuse matters interest rates are calculated on a per-plan basis and for plan 2 loans are further calculated using your income, although recently they have been capped. Overall, these impact your remaining debt and therefore come with the same considerations that we have previously spoken about.

Conclusion

In conclusion, deciding whether to pay off your student loan early begins with evaluating if you are scheduled to pay back your loan with your standard monthly payments. This is influenced by several factors, the most important being, your income, wage growth, remaining debt, and interest rates over your payback period with each factor influencing the other. This requires a lot of foresight, some of which is almost impossible to predict so it is always worth adding a margin of error to all your calculations.

Pros and Cons of Paying Off Student Loans Early

Let's take a quick look at some of the pros and cons of paying back your loan early. These are dependent on your circumstances so try and apply these to your situation.

Pros:

Debt Freedom: It is nice to be debt free. Although student debt is not the same as other debts per se, it is still less of a burden to not have it and eliminating student loan debt provides a sense of financial liberation. You wouldn't need to spend time calculating it anymore as well!

Interest Savings: Paying off student loans early can lead to substantial savings on interest payments, especially if you are expected to fully pay off your loan before it is wiped.

Peace of Mind: Being debt-free offers peace of mind and financial security, allowing individuals to focus on other financial goals and investments.

Cons:

Automatic Write-Off: Student loan debt is automatically written off after a certain period, typically 25 to 40 years. Paying off loans early may result in unnecessary payments if the debt would have been written off before full repayment.

Affordability: Put simply, it costs money. Taking care of your future self is a good mindset to have but you may have other arrangements for that such as a pension. It makes little sense to pay off your student loan if you were to then borrow from elsewhere, especially at a higher rate.

Loan Applications: Since lenders use your bank balance as a deciding factor when it comes to loans student loans don't typically impact your credit score. Instead of helping your chances of getting a loan such as a mortgage, paying off your student loan can damage them.

Unpredictable future: Life throws curveballs your way from time to time and you may find yourself not earning an income and therefore not paying anything towards your student loan. This reduces the chances that you will repay your loan before the termination date. Since this is an unknown you may have already been making overpayments up to this point as you were expected to pay it back and suddenly you are not. If this is enough to stop you from paying back your loan, ultimately those overpayments are lost money.

No credit benefit: You gain nothing in terms of your credit score in paying off your student loan like you would with other loans. This is usually a big driver behind paying off loans like credit cards on time as you are deemed credible. If you are not gaining any credit benefits then you are less incentivised to pay off your loan faster.

How to Pay Off Student Loans Early

Paying off your student loan is usually done via the Student Finance authority that is in charge of your Loan unless you are on a plan 1 loan and you may be with a private lending company. You can find out how your loan works by signing into the student finance website. This can be done via check, direct debit or just a bank transfer. Remember to give the correct and full information. In this section, we will discuss the two most common ways: increased monthly payments and a lump sum.

Increase Monthly Payments: This is where you allocate additional funds towards loan repayment each month to accelerate debt reduction and minimise interest accrual. This is a slow and steady approach that spreads out the additional funds over months or years. This has the benefit of leaving your bank balance healthier but does accrue more interest than paying a lump sum.

Make Lump Sum Payments: The more immediate and potentially simpler way is to utilise extra cash, bonuses, tax refunds, or inheritance, to make lump sum payments towards your student finance debt. This reduces the amount of debt accruing interest the quickest but does have the largest impact on your bank balance. This also has the added benefit of being a bit more of a certainty as it is much easier to predict what is going to happen tomorrow rather than in 20 years.

Automate Payments: If you choose a monthly repayment amount you can set up automatic payments via a direct debit to keep things consistent. This can all be found on the GOV website.

Are overpayments worth it?

Once you have decided that making overpayments is financially prudent and affordable. The next step is to figure out if any potential savings you might get are even worth all the time, effort and money associated with paying down your loan. After all, you don't want to put yourself out of pocket now to save a couple of quid in 20 years. Generally, you would want to see significant savings, but everyone is different. Maybe just knowing it will be gone is worth it alone. Let's take a look at some factors you might consider.

Other Debts: One of the most important factors to consider is any outstanding debts with higher interest rates, such as credit card debt or personal loans. Before allocating funds to student loan repayment, eliminating high-interest debt is a must.

Your Repayment Plan: The student finance repayment plan you are on has a profound impact on whether it is good to pay off your loan earlier. With all things equal, a higher interest rate for a longer loan duration will increase your total payback amount. This is especially noticeable with the loan duration since this is the time you will be making compulsory payments towards your loan, and this can be seen most starkly when comparing plan 2 against plan 5 loans.

Financial Goals: Assess long-term financial objectives, such as homeownership, retirement savings, or investments, before deciding to pay off student loans early. Prioritise goals that align with your values and aspirations.

Employment Stability: Evaluate job security and income stability before committing to early loan repayment. Unforeseen changes in employment status or financial circumstances may necessitate access to liquid funds rather than tied-up capital in loan repayment.

Other alternatives: You should consider how else you could use the extra cash. Whether that is investments, personal development i.e. training, lifestyle improvements or just having a healthy bank balance ready for a rainy day, remember you can earn interest on these savings as well!

Do what's comfortable: This is potentially the most important factor in this list. Making financial decisions requires a certain mindset and as you can see it gets complicated very quickly. Use the resources available to you such as friends and family to help you make the decision that is right for you. There is always going to be an element of being out of your comfort zone, but if you are not 100% on your decision then you are more likely to second guess it later on and return to the 'norm', losing any advantages from paying down your debt.

Use our FREE Student Finance Calculator for a personalised breakdown of your repayments and explore the potential savings through overpayments.