Should You Overpay Your Student Loan?

The question of whether to make extra payments on your student loan is more complicated than it might seem. Unlike most other forms of debt, the unique nature of UK student loans means that overpaying isn't always the financially optimal choice.

This guide will help you determine whether putting extra money toward your student loan makes financial sense for your specific situation.

Before diving into the overpayment analysis, let's quickly recap the key aspects of UK student loans that make them different from conventional loans:

• Income-contingent repayments: You only make repayments when your income exceeds the threshold for your loan plan
• Automatic deductions: Repayments are deducted automatically through the tax system based on your income
• Set percentage: Repayments are 9% of your income above the threshold, regardless of your loan balance
• Eventual write-off: Any remaining balance is canceled after a set period (25-40 years, depending on your plan)
• Interest accrual: Interest rates vary by loan plan and sometimes by income level

These characteristics mean that student loans function more like a graduate tax than a conventional loan for many borrowers. If your income never rises high enough to repay the full amount before the write-off date, you'll never repay the full balance regardless of how much you borrowed.

Making voluntary extra payments on your student loan can be financially advantageous in specific circumstances. Here are the scenarios where it typically makes sense:

1. You're Highly Likely to Repay in Full Anyway

If your income trajectory means you'll repay your full loan before the write-off date, making extra payments can save you money by reducing the total interest that accrues over the life of the loan.

This typically applies to:

• High earners (top 20-30% of graduates) who will pay off their loan regardless
• Those with relatively small loan balances compared to their income
• Graduates with steep career progression early in their career
• People with Plan 1 loans, which have lower balances and interest rates

2. You're Near the Tipping Point

If you're near the break-even point where you might or might not repay in full, making extra payments could tip you into the "will repay in full" category, potentially saving money in the long run.

For example, if you're projected to repay 90% of your loan before the write-off date, making strategic extra payments could help you fully clear the debt and avoid paying interest on the full balance for the maximum period.

3. You Have Plan 1 Loans

Plan a more likely to make sense for overpayment because:

• The repayment threshold is lower (£22,015), so you start repaying at lower income levels
• Loan balances are typically smaller (£3,000-£30,000 range)
• More borrowers will fully repay before the 25-year forgiveness period

4. You Have Strong Psychological Reasons

Some borrowers prefer to be debt-free even if it's not the mathematically optimal choice. If having student debt causes you significant stress or anxiety, and you're in a financial position to make extra payments, the psychological benefit may outweigh the strict financial calculation.

This is a personal choice, but it should be made with full awareness of the potential financial trade-offs.

For many graduates, making voluntary extra payments on their student loan is actually a poor financial decision. Here's why:

1. You Won't Repay in Full Before Write-off

If your income trajectory suggests you won't repay your full loan before the write-off date, any extra payments you make simply reduce the amount that will be forgiven. You're effectively paying money that you wouldn't otherwise have had to pay.

2. Better Investment Opportunities Exist

Even if you will repay your loan in full, there may be better uses for your money if the expected return elsewhere exceeds the interest rate on your student loan.

Consider these alternatives and their historical returns:

• Pension contributions: Tax relief boosts your effective return, with 20-45% immediate "return" through tax savings, plus investment growth
• Stock market investments: Long-term returns of 7-10% annually are historically common
• Employer-matched savings schemes: Instant 100% return on your contribution
• Property deposit: Can help you get on the housing ladder sooner
• Emergency fund: Financial security has significant value

If your student loan interest rate is lower than the potential returns from these alternatives, you may be better off investing your extra money elsewhere.

3. You Have Higher-Interest Debts

If you have other debts with higher interest rates, such as credit cards, personal loans, or car loans, it's almost always better to pay those off before making extra payments on your student loan.

Priority for debt repayment should typically be:

1. High-interest consumer debt (credit cards, payday loans)
2. Personal loans
3. Car loans
4. Student loans (only if you'll repay in full)
5. Mortgage

4. You Might Need Financial Flexibility

Once you make a voluntary overpayment on your student loan, you can't get that money back if your circumstances change. If you might need to:

• Take a career break
• Return to education
• Start a family
• Move to a lower-paying but more fulfilling job
• Deal with unexpected expenses

It's worth considering keeping your money accessible rather than putting it toward loan overpayments.

To help determine whether overpaying is right for your situation, follow this step-by-step framework:

For most graduates with Plan 2 or Plan 5 loans, the analysis typically points toward not making voluntary overpayments. Many borrowers would be better off investing in pensions, ISAs, or even enjoying a slightly higher quality of life instead.