A financial analysis of when making voluntary payments makes sense — and when it doesn't
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.
Key Insight: Due to the income-based repayment system and eventual write-off, many graduates will never repay their full student loan regardless of the amount borrowed. For these individuals, making extra payments often means paying more than they otherwise would have.
Before diving into the overpayment analysis, let's quickly recap the key aspects of UK student loans that make them different from conventional loans:
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.
| Plan | Threshold | Interest Rate | Write-off Period |
|---|---|---|---|
| Plan 1 | £22,015 | Lower of RPI or Bank Rate+1% | 25 years |
| Plan 2 | £27,295 | RPI to RPI+3% | 30 years |
| Plan 4 | £27,660 | Lower of RPI or Bank Rate+1% | 30 years |
| Plan 5 | £25,000 | RPI only | 40 years |
Your loan will be written off in 2052 if you have a Plan 2 loan that became eligible for repayment in 2022.
Use our detailed calculator to determine your specific write-off date and analyze your projected repayments.
Calculate Your Write-off DateMaking voluntary extra payments on your student loan can be financially advantageous in specific circumstances. Here are the scenarios where it typically makes sense:
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:
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.
Plan 1 loans are more likely to make sense for overpayment because:
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:
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.
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:
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.
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:
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:
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.
Use our sophisticated loan overpayment calculator to analyze whether making extra payments makes financial sense for your specific circumstances
Unfortunately, voluntary overpayments to the Student Loans Company cannot generally be refunded. Once you've made an overpayment, that money is permanently applied to your loan balance. This is why it's crucial to carefully consider whether overpayment makes financial sense for your situation before proceeding.
No. Unlike conventional loans, making extra payments on your student loan will not reduce your monthly repayments. Your repayments are fixed at 9% of your income above the threshold, regardless of your remaining balance. Making extra payments will only potentially reduce the length of time you repay, not the monthly amount.
You can make voluntary overpayments to the Student Loans Company through your online account at gov.uk/repaying-your-student-loan. You can make one-off payments or set up regular additional payments. Before making an overpayment, you must specify that it's a voluntary extra payment, not an early repayment of your regular monthly amount. The minimum voluntary payment is usually £5.
No, UK student loans do not appear on your credit report and do not affect your credit score in any way. Neither regular repayments nor voluntary overpayments have any impact on your creditworthiness. Lenders may consider your student loan repayments when assessing affordability for mortgages and other loans, but the loan itself is not part of your credit history.
Yes, if you have multiple student loans (for example, both undergraduate and postgraduate loans, or loans from different plan types), you can specify which loan you want to make extra payments toward. When making a voluntary payment, you'll need to indicate which loan you wish to pay off. If you don't specify, the Student Loans Company will typically allocate the payment to the loan that's accruing the highest rate of interest.
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.