Should you max out your ISA allowance or overpay your student loan? A complete mathematical and practical analysis
For most UK graduates, overpaying student loans is mathematically inferior to maxing out ISA allowances. Here's why: Plan 2 and Plan 5 loans are written off after 30 years, and approximately 83% of borrowers won't fully repay before write-off. If your loan will be forgiven, every pound you overpay is money you'll never benefit from—it simply reduces the amount the government writes off in three decades. Meanwhile, money in an ISA grows tax-free forever, compounds over your lifetime, and remains yours to use for retirement, house deposits, or emergencies.
The £20,000 annual ISA allowance (2024/25) represents a powerful tax-advantaged opportunity. A 25-year-old maxing out their ISA for 40 years accumulates £2.4 million (assuming 7% returns)—all tax-free. By contrast, overpaying a loan that will be written off generates zero long-term benefit. Even comparing interest rates is misleading: Plan 2 loans charge RPI + 3% (currently ~7.3%), but this only matters if you'll repay the full balance. For most graduates, the "interest rate" is irrelevant because loan write-off caps their total repayment regardless of balance.
This guide explains the mathematical reality of loan write-off and why overpayment is usually inefficient, details ISA types (Cash, Stocks & Shares, Lifetime) and optimal usage strategies, provides break-even calculations showing when overpayment makes financial sense, covers decision frameworks based on income trajectory and loan balance, includes detailed scenarios comparing 30-year outcomes of ISA vs overpayment, and offers hybrid strategies combining both approaches strategically. Whether you have £50k loans on £30k salary or £40k loans on £60k salary, understanding these trade-offs is crucial for building long-term wealth.
The core question: you have £5,000 spare this year. Should you put it in an ISA or overpay your student loan? The answer depends critically on whether you'll fully repay your loan before write-off.
ISA annual allowance (2024/25):
£20,000 across all ISA types combined
Student loan write-off:
30 years (Plan 2/5), 25 years (Plan 4)
Borrowers reaching write-off:
~83% won't fully repay (Plan 2)
~83% won't fully repay (Plan 2)
ISA tax advantages:
No income tax, no capital gains tax, forever
Loan overpayment benefit:
Only if you'll repay in full before write-off
Lifetime ISA bonus:
25% government bonus (up to £1,000/year)
Most graduates will NEVER fully repay their student loans. This fundamentally changes the overpayment calculation.
Example: Typical Graduate
Result: If they'd overpaid £10,000 early on, they'd have repaid £52,000 total instead of £42,000, and £88,000 would be written off instead of £98,000. Net benefit: £0. They paid £10,000 extra for no gain.
Contrast: If Same £10,000 Went Into ISA
Result: £10,000 → £76,123 vs £10,000 → £0 benefit from overpayment.
You should consider loan overpayment ONLY if you'll definitely repay in full before 30-year write-off:
Rule of thumb: Use a student loan calculator to project total repayment. If projected repayment ≥ current balance + 10%, overpaying might make sense. If projected repayment < current balance, overpaying is throwing money away.
| Your Situation | Recommendation | Priority | |
|---|---|---|---|
| Salary £25-45k, loan £40k+ | Max ISA, don't overpay | Max ISA, don't overpay | 1. Emergency fund 2. ISA 3. Ignore loan |
| Salary £60k+, loan £50k | Calculate if you'll repay fully | 1. Emergency fund 2. ISA vs overpay (analyze) | |
| Small loan £15k, any salary | Consider overpayment after ISA | 1. Emergency fund 2. ISA 3. Overpay if excess | |
| Under 40, buying house soon | Lifetime ISA (25% bonus) | 1. LISA max 2. Emergency fund 3. Other ISAs | |
| Plan 1 loan (pre-2012) | Overpay may make sense | 1. Emergency fund 2. Calculate (often worth it) |
Many graduates feel anxious about their "debt" and rush to overpay. This is emotionally understandable but financially suboptimal:
Reframe: Student loans are a 9% graduate tax for 30 years, not traditional debt. Treat repayments like tax deductions—unavoidable but not worth accelerating.
Individual Savings Accounts (ISAs) are the UK's most powerful tax-advantaged investment wrapper. Every UK resident 18+ can contribute £20,000 annually (£4,000 for Lifetime ISAs). All growth, dividends, and interest are tax-free forever.
1. Cash ISA
2. Stocks & Shares ISA
3. Lifetime ISA (LISA)
4. Innovative Finance ISA
£20,000 annual limit (2024/25):
Can split across multiple ISA types, but total cannot exceed £20,000 per tax year (April 6 - April 5)
Lifetime ISA sub-limit:
Max £4,000 in LISA (counts toward £20k total). Can put remaining £16k in other ISAs.
One of each type per year:
Can open/contribute to one Cash ISA + one S&S ISA + one LISA per tax year. Cannot spread £10k across two Cash ISAs in same year.
Use it or lose it:
Unused allowance doesn't roll over. Miss a year = permanently lost tax-free growth opportunity.
Unused allowance doesn't roll over. Miss a year = permanently lost tax-free growth opportunity.
Flexibility:
Can withdraw and re-deposit within same year (counts as new contribution). Some providers offer "flexible ISAs" preserving allowance on withdrawal.
Example: Starting at Age 25 vs 35
| Scenario | Years Contributing | Total Contributed | Value at 65 (7%) |
|---|---|---|---|
| Start 25, max £20k annually | 40 years | £800,000 | £4,332,194 |
| Start 35, max £20k annually | 30 years | £600,000 | £2,042,650 |
| Cost of 10-year delay | -10 years | -£200,000 | -£2,289,544 |
Insight: Delaying ISA contributions by 10 years costs £2.3 million in lost tax-free growth, even though you only contributed £200k less. Compound growth in tax-free wrapper is extraordinary—don't sacrifice it to overpay a loan you won't fully repay.Insight: Delaying ISA contributions by 10 years costs £2.3 million in lost tax-free growth, even though you only contributed £200k less. Compound growth in tax-free wrapper is extraordinary—don't sacrifice it to overpay a loan you won't fully repay.
1. First-time buyers under 40:
Max Lifetime ISA first (£4,000 + £1,000 bonus = £5,000). Use for house deposit. Remaining £16k into S&S ISA for long-term growth.
2. Building emergency fund:
Put 3-6 months expenses in Cash ISA (instant access). Once established, shift future contributions to S&S ISA for growth.
3. Long-term investors (10+ year horizon):
Max S&S ISA in global index funds. Historical 7-10% returns far exceed loan interest, especially given write-off likelihood.
4. Conservative savers:
Cash ISA earning 5% beats overpaying loan if you'll reach write-off. Even conservative returns better than £0 benefit from overpayment.
Why ISAs beat regular savings/investment accounts:
| Factor | ISA | Regular Account |
|---|---|---|
| Interest/dividends | 100% tax-free | Taxed (basic rate 20%, higher 40%) |
| Capital gains | 100% tax-free | Taxed after £3,000 allowance (10-20%) |
| Annual admin | None | May need tax return for gains |
| Lifetime value (£100k → £1M) | Keep full £1M | Pay ~£180k+ in taxes over time |
Bottom line: Always max ISA allowance before putting money in taxable accounts. The tax savings compound significantly over decades.
Understanding write-off is critical to making the right financial decision. Most repayment projections show loans growing over time, not shrinking—interest outpaces repayments for typical graduates.
Plan 2 Loan: £50,000 Balance, £32,000 Starting Salary
Repayment calculation:
9% of income above £27,295 threshold
At £32,000: (£32,000 - £27,295) × 9% = £423.45/year
Interest calculation (first year):
£50,000 × 7.3% = £3,650/year
Annual deficit: £3,650 interest - £423.45 repaid = +£3,226.55 added to balance
Even with salary growth to £45,000 by age 50:
Repayment: (£45,000 - £27,295) × 9% = £1,593/year
Interest: £75,000+ balance × 6% = £4,500+/year
Still not keeping up with interest
At 30-year write-off:
Total repaid: ~£38,000
Balance at write-off: ~£95,000
Government writes off: £95,000
| Plan | Threshold | Write-Off Period | Interest Rate | % Expecting Write-Off |
|---|---|---|---|---|
| Plan 1 | £22,015 | 25 years (or age 65) | RPI + 0-1% | ~40% |
| Plan 2 | £27,295 | 30 years | RPI + 0-3% | ~83% |
| Plan 4 | £27,660 | 25 years | RPI + 0-1% | ~70% |
| Plan 5 | £25,000 | 30 years | RPI + 0-3% | ~80% |
| Postgrad | £21,000 | 30 years | RPI + 3% | ~50% |
Source: IFS analysis, government actuarial estimates. Percentages vary by cohort and economic assumptions.
Very likely to write off (>90% chance):
Likely to write off (60-80% chance):
May repay before write-off (30-50% chance):
Will repay before write-off (>70% chance):
Think of it this way:
Scenario A (Most graduates): You'll repay £45,000 over 30 years regardless of whether balance is £50k or £80k at start. The government writes off the rest. Overpaying £10,000 just means you pay £45,000 total instead of the government writing off £10,000 more. Your lifetime payment: unchanged.
Scenario B (High earners): You'll repay full £50,000 in 15 years. Overpaying £10,000 now saves you interest on that £10k for the remaining years. Actual benefit: ~£3,000 saved interest. But £10,000 in ISA for 15 years at 7% = £27,590. ISA wins even for those who will fully repay.
Conclusion: Unless your loan has very high interest AND you'll definitely repay in full quickly, ISAs virtually always beat overpayment mathematically.
Let's compare £10,000 used for ISA investment vs loan overpayment across various scenarios:
Profile: £50k loan, £32k salary rising to £45k
Option A: £10,000 in S&S ISA
• Invested at age 25
• 7% average annual return
• Hold until age 55 (30 years)
Value: £76,123
• All tax-free, yours to keep
• Can use for house, retirement, emergencies
• Compounds for entire career
Option B: £10,000 Loan Overpayment
• Reduces loan from £50k to £40k
• Saves interest on that £10k
• BUT: Loan still grows overall
• At year 30: balance ~£95k vs £105k
Benefit: £0
• Total repaid over 30 years: £38,000
• With or without overpayment: same
• £10,000 overpaid = £10,000 more write-off foregone
ISA advantage: £76,123
The overpayment had literally zero financial benefit because loan was written off anyway.
Overpayment only makes sense if the interest saved exceeds ISA growth. This requires:
Otherwise interest "savings" are illusory—government absorbs them at write-off
Plan 2 at 7.3% vs S&S ISA at 7%? Close, but see point 3...
Long timelines favor ISA due to compound growth. Even if rates similar, ISA compounds tax-free for life
Emergency fund, house deposit, pension matching all typically trump loan overpayment
Example scenario where overpayment wins: £20k loan, £65k salary. Will repay in 6 years. £5,000 overpayment saves ~£1,800 interest vs £5,000 in ISA for 6 years at 7% = £7,503. But after tax (since taxable account vs ISA), difference narrows. ISA still likely better for long-term compounding after loan is paid.
| Investment | Rate/Return | Tax Treatment | Risk | Accessibility | |
|---|---|---|---|---|---|
| Cash ISA | 4-5% | 100% tax-free | Zero (FSCS) | Instant access options | |
| S&S ISA (global index) | 7-10% long-term avg | 100% tax-free | Moderate volatility | Sell anytime, 1-3 days | |
| Lifetime ISA | 25% bonus + growth | 100% tax-free | Penalty if withdrawn wrongly | Locked until house/60 | |
| Plan 2 overpayment | ~7.3% (RPI+3%) | N/A (loan reduction) | HIGH: may get £0 benefit | Irreversible | |
| Plan 5 overpayment | ~7.3% (RPI+3%) | N/A (loan reduction) | HIGH: 80% won't fully repay | HIGH: 80% won't fully repay | Irreversible |
| Plan 1 overpayment | ~5% (RPI+1%) | N/A (loan reduction) | Medium: 40% won't fully repay | Medium: 40% won't fully repay | Irreversible |
Key insight: Loan "interest rate" is only relevant if you'll definitely repay in full. For most graduates, effective rate is 0% (because write-off). ISA rates are guaranteed benefit.
Three graduates, each save £5,000/year for 30 years:
| Strategy | Total Contributed | Loan Balance at 30yr | ISA Value at 30yr | Net Wealth |
|---|---|---|---|---|
| Graduate A: All to loan overpayment | £150,000 | £0 (paid early) | £0 | £0 |
| Graduate B: Mix (£2.5k each) | £150,000 | £45k (write-off) | £243,280 | £243,280 |
| Graduate C: All to ISA | £150,000 | £95k (write-off) | £486,559 | £486,559 |
Assumes: Plan 2 loan, salary profile with write-off at 30 years, ISA at 7% annual return. Graduate A has no debt but no wealth. Graduate C has "debt" (which is written off) but massive wealth.
Use this framework to determine your optimal strategy:
Use a student loan calculator to project:
Quick test without calculator:
If your balance is £45k+ and salary will stay under £55k for most of career → almost certain write-off
Indicators:
Optimal Strategy:
Why: Every pound to ISA creates wealth. Every pound to loan overpayment vanishes at write-off. This is mathematically definitive.
Indicators:
Optimal Strategy:
Why: When uncertain, choose reversible option. ISA can always be withdrawn later to overpay loan if circumstances change. Overpayment is irreversible.
Indicators:
Optimal Strategy:
Calculate interest saved by overpaying vs ISA growth
Typical result: ISA still wins due to long-term compounding
Why: Even high earners benefit more from ISA in most cases. But if loan interest >9% and repayment within 5 years, overpayment might edge out.
Indicators:
Optimal Strategy:
Years to repay × loan interest vs same years ISA growth
Why: At £70k+ salary, you're likely maxing ISA (£20k) anyway plus pension (£40k). Surplus can go to loan. But ISA should still come first.Why: At £70k+ salary, you're likely maxing ISA (£20k) anyway plus pension (£40k). Surplus can go to loan. But ISA should still come first.
Real-world examples showing 30-year outcomes:
Profile:
Strategy A: Max ISA (£8,000/year)
ISA contributions:
• Ages 23-53: £8,000/year = £240,000 total
• Value at age 53 (7% return): £761,225
• All tax-free, fully accessible
Loan status:
• Total repaid via PAYE: £39,500
• Balance at year 30: £103,000
• Written off: £103,000
Net wealth: £761,225
Strategy B: Overpay Loan (£8,000/year)
Loan overpayments:
• Ages 23-35: £8,000/year = £96,000 overpaid
• Loan cleared at age 35
• Total repaid: £135,500 (PAYE + overpay)
Ages 35-53 strategy:
• Start ISA contributions
• 18 years × £8,000 = £144,000
• ISA value at 53: £283,104
Net wealth: £283,104
Difference: £478,121 worse off by overpaying
She paid £96,000 extra to clear loan 18 years early, missing out on 18 years of compound ISA growth. The loan would've been written off anyway. Catastrophic financial mistake.
Profile:
Loan Projection:
• Will repay full balance by age 36 (14 years)
• Total to be repaid: ~£52,000 (including interest)
• This is one of rare cases where overpayment might help
Strategy A: Max ISA First
• Ages 22-36: £15,000/year to ISA
• Value at age 36: £322,717
• Loan repaid via PAYE by age 36: £52,000
• Ages 36-52: Continue £15k/year ISA
• Additional ISA value: £595,464
Total at age 52: £918,181
Strategy B: Overpay Loan £5k/Year + £10k ISA
• Ages 22-28: £5k overpay, £10k ISA
• Loan cleared 2 years early (age 34)
• Interest saved: ~£3,200
• ISA value at 34: £99,715
• Ages 34-52: Full £15k/year ISA
• Additional value: £662,000
Total at age 52: £761,715
Difference: £156,466 better off NOT overpaying
Even for high earner who will fully repay, ISA-first strategy wins by £156k. The 7-year difference in compound growth dominates the £3,200 interest saved. This shows even "ideal" overpayment scenarios usually lose to ISA strategy.
Profile:
Lifetime ISA Strategy:
Ages 24-30 (6 years):
• Contribute £4,000/year to LISA
• Government adds £1,000/year bonus
• Total contributed: £24,000
• Bonuses received: £6,000
• Investment growth at 5%: £3,247
• Total for house: £33,247
• Remaining £2,000/year in S&S ISA: £12,764 at age 30
Age 30+: Continue £6k/year to S&S ISA after house purchase
vs Overpaying Loan: If she'd overpaid £4,000/year instead, she'd have only £24,000 toward house (no bonus), loan still wouldn't be cleared (balance still £60k+ at age 30), and missed out on £6,000 free government money. LISA dominates overpayment when buying house under 40.
In practice, most people should follow a priority waterfall rather than putting all spare money in one place:
Emergency Fund (3-6 Months Expenses)
In Cash ISA for instant access. Example: £10,000 in Marcus Cash ISA at 5%. Protects against job loss, unexpected bills. Non-negotiable first priority.
Employer Pension Match (Up to Maximum Matched)
Free money—if employer matches 5%, contribute 5%. Typical: 3-6% match = instant 50-100% return. Beats everything else including ISA.
Lifetime ISA (If Under 40 and Saving for House/Retirement)
25% government bonus = guaranteed return. £4,000 contribution → £5,000 invested. Beats any loan interest rate. Max this before S&S ISA.
Max Stocks & Shares ISA (Remaining £16,000 Allowance)
Global index funds for long-term growth. Tax-free compounding beats loan overpayment for 95%+ of graduates. Use full allowance if possible.
Additional Pension Contributions
Beyond employer match, pension gets tax relief (20-45%) and grows tax-free. For higher earners, this beats loan overpayment. For basic rate, ISA vs pension is close call—ISA more flexible.
Taxable Investment Accounts (Once ISA Maxed)
If you've maxed £20k ISA, £40k pension, and still have surplus, invest in taxable accounts (stocks, bonds). Still beats loan overpayment due to write-off.
Student Loan Overpayment (Maybe)
ONLY if: (a) Definite full repayment before write-off, AND (b) All above priorities met, AND (c) Calculated break-even shows overpayment wins. For 90%+ of graduates, never reach this step.
Graduate with £36,000 salary, £47,000 Plan 2 loan, age 26:
Phase 1 (Months 1-4): Build Emergency Fund
• £1,000/month to Cash ISA
• Target: £4,000 (covers 2 months expenses)
• Once hit, move to Phase 2
Phase 2 (Months 5-8): Max Lifetime ISA
• £333/month to LISA (£4,000/year limit)
• Gets £1,000 government bonus
• Remaining £667/month to S&S ISA
Phase 3 (Month 9+): Max S&S ISA
• Full £1,000/month to S&S ISA
• Reaches £12,000/year invested
• After LISA limit hit (April)
Loan Status: Ignore Completely
• Let PAYE deductions happen automatically
• Loan will be written off at age 56
• Zero benefit from overpaying
Most graduates can't afford £20,000/year into ISAs early career. That's fine—just follow priority order with what you have:
Saving £200/month:
Emergency fund first (£2,000-3,000), then split £100 LISA / £100 S&S ISA. Don't worry about maxing—compound growth on £2,400/year is still powerful.
Saving £500/month:
Emergency fund, then £333 LISA + £167 S&S ISA. Once LISA maxed for year, full £500 to S&S ISA. Still way better than overpaying loan.
Saving £1,500+/month:
Can max ISA (£1,667/month average). Surplus goes to pension or taxable investments. At this income level, loan overpayment still typically suboptimal.
Practical steps to execute ISA-first strategy:
Cash ISA (Emergency Fund):
Stocks & Shares ISA (Long-Term Growth):
Lifetime ISA (House Deposit / Retirement):
Set it and forget it:
• £X to Cash ISA (if building emergency fund)
• £Y to LISA (monthly amount toward £4k limit)
• £Z to S&S ISA (remaining savings allocation)
• Rebalance allocations if priorities changed
• Update contribution amounts if salary changed
• Check you've used full ISA allowance
Each April (new tax year), review:
Did I max my ISA allowance? (£20,000) If not, why? Can I increase this year?
Is my emergency fund still adequate? (3-6 months current expenses)
Did I max LISA if applicable? (£4,000 + £1,000 bonus)
Has my salary changed significantly? Adjust monthly contributions accordingly.
Check student loan balance—still projected for write-off? (Use calculator)
Are my investments properly diversified? (Global index funds recommended)
Rebalance S&S ISA if needed (target allocation)
Review platform fees—could I save money switching providers?
The mathematics is unambiguous: if your loan will be written off (83% of Plan 2 borrowers), every pound overpaid generates zero financial benefit—it simply reduces the amount the government writes off in 30 years. Meanwhile, £10,000 in an ISA at age 25 becomes £76,000 by age 55 (7% returns), all tax-free. Even high earners who will fully repay typically benefit more from ISA tax-free compounding than from marginally earlier loan repayment. The Lifetime ISA's 25% government bonus definitively beats any student loan interest rate for first-time buyers under 40.
Priority order: Emergency fund → Employer pension match → Lifetime ISA (if under 40) → Max S&S ISA → Additional pension → Taxable investments → (Maybe) loan overpayment. Use student loan calculators to project write-off likelihood—if balance will be forgiven, treat loan repayments as unavoidable 9% graduate tax, not debt to eliminate. Focus financial energy on building tax-advantaged wealth in ISAs. The difference between ISA-first and overpayment-first strategies can easily exceed £500,000 by retirement.
UK Education Policy Specialist
With over 15 years of experience in UK education policy and student finance, Dr. Sharma founded Student Loan Calculator UK to help students navigate the complex world of student loans.