Martin Lewis: Should I overpay my student loan?
Beware student loan statements, they're dangerous and misleading. I wish I could tell you to rip 'em up without looking at them, but occasionally there's practical info you need. Over five million uni leavers still have outstanding loans. Many panic seeing £100s interest added each month – a financial canker that's led some into making catastrophic decisions.
No surprise then that one of the most common questions I'm asked by those with a little spare cash is: "Should I be trying to clear my student loan?" I've written large, detailed guides on this many times before, but the exact answer (or more accurately the reasons for it) depends on various factors. So I thought I'd put together this speedy briefing. Then if you want to read more, I've added links to more detailed pieces.
Which student loan plan do you have?
There are three main types.
- Plan 2: All from England or Wales who started university in or after 2012, including current students.
- Plan 1: All who started university between 1998 to 2011, and students from Scotland and Northern Ireland since 2012.
- Mortgage-style loans: All those who started between 1991 to 1997.
So now let's take each of those loan types in turn...
Plan 2 loans (England & Wales starters 2012+)
Psychologically, these are the scariest type of student loans, as the debt can be up to £60,000. The interest is high too. It changes annually with inflation, but for this academic year 5.4% is added while at university, then 2.4%-5.4% – depending on income – is added when you leave (see how the interest is calculated).
Yet while this is what statements show, for most these numbers are irrelevant as what you owe (the borrowing plus interest) ISN'T what you pay back.
What you repay each year depends solely on what you earn. You repay 9% of earnings over £25,725 (£26,575 from next April) – earn less and you pay nowt.
In effect it's like 9% additional tax, as whether you owe £50,000 or £3 million, your annual repayments stay the same.
The prime difference the amount owed makes is whether you'll clear the loan or not within the 30 years before it wipes. The Institute for Fiscal Studies estimate that 83% WON'T.
Of course, those who never earn over the threshold won't repay owt at all. Those who repay just above it will repay some of their original loan, but no interest. Mid earners may pay the loan and some interest, but less than inflation, so there's no 'real cost'. Mid to high earners may pay real interest, but still not everything on the statement. So for all those groups, the interest you see added to your statement is NOT the interest you pay.
The only people for whom statements tell the truth is that top 17% of earners who'll clear it within the 30 years.
Tragically, the pressure of seeing that oft-irrelevant interest build up pushes people to make mistakes. One woman told me she'd used an inheritance of a few thousand to overpay her student loan to 'reduce' the interest. Yet she was a low earner, so those overpayments are unlikely to reduce what she'll pay in future by even a penny. It's money flushed down the loo, as you can't get back voluntary overpayments.
Therefore for those with spare cash, first use it to clear other expensive debt. After that, save it to reduce the need for future borrowing. I'd suggest building up a mortgage deposit is a far better use of the cash (see the LISA and Help to Buy ISA guides). After all, with other debts if you lose your job they still chase them, but with student loans lower income means you don't repay.
Only those who'll be consistently high earners over the 30 years, and won't need to borrow anywhere else, can truly say: "The interest costs more than I earn saving, so I'll pay it off". For full info, see my detailed Should I pay off my Plan 2 student loan? guide.
PS: The student loan statements for Plan 2 loans are poor, so – working with Universities UK – we did a student loan statement redesign. The feedback was hugely positive. Then in May 2019, the Augar report on higher education recommended that the redesign be implemented. No surprise though, it hasn't happened.
Plan 1 loans (All student starters 1998-2011, Scotland & NI since then too)
Here, the logic is different to Plan 2, as you likely borrowed less originally, and repay MORE each year (9% of everything earned over £18,935). Therefore, you're far more are likely to clear the debt before it wipes. Exactly when it wipes depends on which country you studied in and when, but it's usually 25-30 years (see my When will my student loan wipe? blog).
However, the interest rate here is far cheaper, set at the LOWER of either the rate of inflation or the Bank of England base rate plus 1%. Currently it's 1.75%.
That's cheaper than almost all other long-term borrowing, so definitely clear those first. Yet even if you've no borrowing now and will never need it, the top fixed savings accounts (see Top Savings) pay more than this loan charges you.
So as long as you trust yourself not to splurge it, most people should just save it there rather than overpay their loan. For more on this, watch my new Should I pay off my Plan 1 student loan? video...
To read how it works in detail, see the Should I pay off my Plan 1 student loan? guide.
These are very different. Unless you earn over the £32,347 threshold, you can defer and not repay. If you earn above the threshold you pay in fixed instalments, like a personal loan. However, if your loan is still outstanding now, for most it's unlikely you'll clear it before it wipes. So why overpay?
And even if not, the interest rate is set at the rate of inflation, so there's no real cost anyway. For more info, see Should I overpay my mortgage-style student loan?
Got a Plan 1 and Plan 2 loan?
There are a whole host of circumstances where you may have two different loans running at the same time. The most common situation is where you have a Plan 1 and a Plan 2 loan. If that happens, you repay both.
- Income under the Plan 1 threshold (currently £18,935) – you repay nothing.
- Income above the Plan 1 threshold (currently £18,935) and up to the Plan 2 threshold (currently £25,575) – your 9% repays the Plan 1 loan.
- Income above the Plan 2 threshold (currently £25,575) – your 9% repays the Plan 2 loan.
You can't vary this payment, as it is automatically allocated. However, you could volunteer to overpay one or the other, or both. Whether you should do that follows the same logic as above – don't just judge based on the raw interest rate added, judge on whether you're likely to actually repay that interest.
PS: Reclaim student loans if you repaid too early
In just one three-year period, over 100,000 people started repaying their student loans too early, and are due £100s' cash back. If you went to uni since 1998, you should only have started repaying in the April after leaving – often around nine months later.
Yet many employers have incorrect info about uni leaving dates, and as you repay student loans via the payroll, they automatically start taking it too early.
If you overpaid in error, you can get the money back. If possible, check your payslips and call the Student Loans Company (SLC) with your national insurance number. If you don't have any of these, just call it anyway on 0300 100 0611 and ask it to check.
I've had many success reports, like Soph's tweet: "Thank you @MartinSLewis just got off the phone with SLC and claimed £358 back. A lovely addition to the wedding fund #martinlewis #winner".
As I've explained above, for most people, getting this money back won't result in you needing to pay more later. See Reclaim student loans for more.
Do let me know your thoughts via the comments below.