Question 1

Should I overpay my student loan or contribute more to pension?

Accepted Answer

For 83% of Plan 2 graduates whose loans will be written off after 30 years, pension contributions are dramatically better. A £1,000 pension contribution receives 20-40% tax relief immediately and grows tax-free at 7% average returns, becoming £7,612 over 30 years. The same £1,000 overpaying a loan that gets written off provides £0 benefit. Only contribute to pensions beyond employer match if you are certain to fully repay before write-off (typically earning £50,000+ throughout career) or are a higher-rate taxpayer where 40% relief makes pensions extremely valuable.

Question 2

How do I know if my student loan will be written off?

Accepted Answer

Plan 2 loans are written off after 30 years regardless of balance. If your loan balance is growing not shrinking (interest exceeds repayments), you will definitely not fully repay. For typical graduates earning £25,000-£45,000, loan balances grow from £45,000 at graduation to £60,000-80,000+ over 30 years before write-off. Only graduates earning £50,000+ consistently throughout their career have a realistic chance of full repayment. Use a student loan calculator to project your specific outcome based on salary, loan size, and repayment track.

Question 3

What returns does a pension get compared to student loan interest?

Accepted Answer

Pensions invested in diversified stock funds average 7-10% annual returns over 30 years. Student loan interest is RPI+3% (currently 7.3% but historically 3-6%). However, this comparison is misleading because loan overpayments provide 0% return if the loan gets written off, while pension contributions get 20-40% tax relief immediately plus compound growth. A £10,000 pension contribution grows to £76,123 over 30 years. The same £10,000 overpaying a loan that gets written off provides £0 future value. The effective return of overpayment depends entirely on write-off likelihood.

Question 4

Does pension contribution reduce my student loan repayments?

Accepted Answer

Yes, if you use salary sacrifice pension contributions. Salary sacrifice reduces your gross salary before PAYE, which reduces student loan repayments by 9% of the sacrificed amount (Plan 2). For example, a £3,000 annual pension contribution via salary sacrifice saves £270 in student loan repayments, £600 in income tax (20%), and £360 in National Insurance (12%), totaling £1,230 saved. Your net cost is £1,770 for a £3,000 pension contribution plus employer match. This is dramatically better than taking £1,770 cash and overpaying your loan.

Question 5

When should I prioritize loan overpayment over pension?

Accepted Answer

Only overpay your student loan if: (1) You are certain to fully repay before 30-year write-off (rare - requires £50,000+ salary throughout career), (2) Your loan balance is small (under £15,000) and you will clear it in 5-10 years naturally, making overpayment provide genuine interest savings, or (3) You are approaching retirement (age 50+) with 5-10 years until loan write-off and want to eliminate the monthly repayment for budgeting simplicity. For 90%+ of Plan 2 graduates under 40, pension contributions to employer match plus ISA savings beats loan overpayment by £100,000-300,000 over 30 years.

Pension vs Student Loan Overpayment Calculator

Recommendation: Prioritize Pension Contributions

30-Year Comparison

30-Year Outcome Comparison

Extra to Pension

Extra to Loan Overpayment

Key Decision Factors

Relative Outcomes

Understanding the Outcome

How to Use This Calculator

What It Compares

Key Assumptions

When to Prioritize Each Option

Pension Contributions Are Your Best Bet

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