Learn > Student Loans > Should I pay off my student loan?

Debt is a social construct.

So you’ve just finished 3 years of uni and now owe this mysterious £50,000 back to the Student Loans Company. This is often described as a noose around your neck but let’s discuss why it isn’t.

9% is nothing.

Each month, if you earn over £2,214 you will pay 9% of the excess back to the Student Loans Company.

This continues for 30 years after the April following your graduation (to align with tax years) so assuming you don’t think you will earn you will earn much over this, you would not even scratch the surface of the £50k you owe.

But why do people want to pay this back? If you look at it as a big number you owe to someone you will usually feel awkward or wary because that is how debt has been taught in schools. You were simply told all debt is bad by the same people who said “You must go to university” - This is why the education system is broken.

If you look at it and see £50,000 owed from you to someone else and then see a 5.4% (2020) interest rate being applied to this (compound interest of course) you would instantly want to pay this back as soon as possible. But let’s look at an example for the average Joe:

Example:

Let’s assume you graduate university and get a job paying £30,000 a year - well done this is a decent salary for a graduate.

Assume you earn this for 5 years before getting a promotion where you earn £40,000 a year for the next 10 years.

After this 10 years you move to a different position earning £50,000 a year where you stay for the next 5 years.

How much would you pay back?

First 5 years: (£30,000 - £26,575 = £3,425) x 9% = £308.25 x 5 = £1,541.25

Next 10 years: (£40,000 - £26,575 = £13,425) x 9% = £1,208.25 x 10 = £12,082.50

Last 15 years: (£50,000 - £26,575 = £23,425) x 9% = £2,108.25 x 15 = £31,578.75

Total repayments before the loan is written off = £45,202.50

Verdict - Had you paid off the fifty thousand odd you owed immediately you would have wasted at minimum £5k.

Of course, this example isn’t representative as the earnings and level at which you have to start repaying will change every year but it demonstrates just how student loan repayments work and why paying it off early could be a mistake.

Things to consider

Are you going to be a high earner?

If so, paying off the student loan will be worthwhile as soon as possible to prevent high interest rates being applied. Speak to a financial adviser before doing this as the calculations can be quite complex.

Are you certain of your future income levels for the next 30 years?

If not, be careful before you make any rash decisions. It could end up being less beneficial - e.g - paying off a loan when you wouldn't have otherwise.

What are you other financial goals?

If you are saving for a house deposit and feel like you should pay off your loan first, you should really consider whether this is the right decision for the long-term. Housing prices historically tend to increase at a higher rate than the interest charged on your student loan, and if you are unlikely to ever fully pay off your loan you have given up the opportunity to buy a house.

Links to Government info

Want to know which plan you are on? (The above calculations refer to Plan 2) - Find out here.

Need to know how to make extra repayments? - See here.

This does not constitute financial advice and should only be used for informational purposes. Should you wish to further discuss student loan repayments please drop us an email and we can put you in touch with a qualified financial adviser.

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