Should you pay off student loans early?

Key Takeaways

• You can pay off your student loan early, but it’s not always the smartest move.
• Student loans don’t affect your credit score. 
• Most borrowers won’t repay the full balance anyway. 
• Repayments are income-based, not balance-based. 
• Paying it off early could reduce your mortgage deposit.
• Early repayment tends to suit high earners with no competing goals.

Can you pay off student loans early?

Yes, if you’d like to free yourself from student debt, you can pay off your student loans early. However, just because you can pay off your student loan early doesn’t mean you should. There are significant differences between student debt and other types of borrowing, such as mortgages, credit cards and personal loans, which impact when you pay back your loan. 

These include:

• Your student loan repayments are paused if your income falls below the threshold
• Your student loan won’t affect your credit score
• You’ll only ever repay 9% of your salary, regardless of how much you owe
• Your monthly repayments won’t increase, even if interest rates do
• Your outstanding student debt will be wiped after a certain period of time

This can mean that sometimes paying your student loan back over time makes more sense than paying it back in a lump sum.

How do UK student loans work?

How a student loan works depends on which repayment plan you’ve got and when you’ll start repaying the money. There are two types of student loans: Plan 1 and Plan 2 loans. Regardless of whether you have a Plan 1 or Plan 2 loan, your repayments will be deducted from your salary before they reach your current account. Because of this, some people choose to think of student loans as a type of tax, rather than a debt.

Plan 1 - undergraduate courses that began before 1 September 2012

If you have a Plan 1 loan, you’ll start repaying your loan once you earn more than £26,900 a year, and you’ll repay 9% of your income over this threshold. So if you earn £33,000 a year, you’ll pay £540 a year. 

With a Plan 1 loan, your interest rate will be the lower of the following two options:

• The Bank of England base rate
• The rate of inflation. The rate is fixed on the 1st September each year and is based on the Retail Prices Index (RPI) from the previous March.

Plan 2 – undergraduate courses that began after 1 September 2012

If you have a Plan 2 loan, you’ll start repaying your loan once you earn over £29,385 a year and you'll repay 9% of your income over this threshold. So if you have a salary of £38,470, you will repay £325.35 per year. 

However, your loan also earns interest, which is linked to Retail Prices Index (RPI) inflation - currently around 3.8% - with up to an additional 3% added depending on income. This means you could face interest rates of around 6% or more. And because of that interest, you may see your loan balance increase even while you're making repayments.

Is it better to pay off student loans early?

For some people, paying off their student loans early could be better than keeping the money in savings. But this depends on how much you earn, how much interest you pay on your student loan, and the current savings interest rates. For most borrowers, however, it is better to save the money, invest it, or use it to pay off other debts.

This may seem to contradict traditional financial advice. After all, when considering other types of borrowing, if you’re paying a higher interest rate on your debt than you can earn in savings, it often makes sense to use your savings to pay down debt.

However, as we mentioned earlier, student debt isn’t like other types of debt. Not only does it not damage your credit rating, but there are protections in place to protect low-earning graduates. Plus, rising interest rates don’t affect the affordability of the loan (since the percentage you’ll repay will remain the same).

Whether it is better to pay off your student loans early or pay the minimum amount each month will depend on the type of student loan plan you have, your individual financial situation, and your life goals.

No matter what your situation, it’s a good idea to speak to a financial advisor before paying your student loan early. They’ll go through your finances with a fine-tooth comb and work out whether it is a smart move for you. They might even be able to offer alternatives that you had not considered.

One of the biggest and yet least discussed impacts of student loans is how they affect mortgage affordability. Mortgage lenders don’t treat student loans like traditional debts; they generally ignore the total balance. But they do factor in your monthly repayments when working out what you could borrow for a mortgage, reducing the income lenders think you have available for a mortgage.

Learn more: Do I need a financial advisor?

Frequently asked questions

Does a student loan affect credit scores?

In the UK, no. Student loans do not appear on your credit report, so they do not impact your credit rating. This means that even if you leave university with a large student loan balance, you can still achieve and maintain a strong credit score.

However, the monthly deduction shown on your payslip can still matter when you apply for other borrowing. Mortgage lenders, for example, look at your take-home pay and outgoings to judge affordability.

The bottom line: a student loan can reduce how much you’re able to borrow, but it won’t hurt your credit score itself.

Outside the UK, it’s a different story: in some countries, student loans are reported to credit bureaus and missed payments can harm your score. Because UK loans are repaid through PAYE rather than direct debits, they stay completely off your credit file.

Does paying off a student loan help credit scores?

Paying off your UK student loan will not change your credit score. The loan never appears on your credit file, so clearing the balance early won’t boost (or harm) your rating.

What does improve? Your disposable income. Once your loan has gone, you’ll keep a larger slice of your salary each month, which can strengthen future mortgage applications.

You can check exactly how much extra cash you’ll have by using our Take-Home Pay Calculator.

Does having a student loan make it harder to get a mortgage?

Not usually. Student loans don’t appear on your credit file, so they don’t harm your credit score. But mortgage lenders still count the monthly repayment shown on your payslip when they check affordability. A higher repayment means a little less disposable income, which can reduce the amount you’re offered. Paying the loan off early could lift your borrowing power, but only if it doesn’t drain the savings you need for a deposit or emergency fund.

When should student loans be paid off early?

It may be a good idea to pay off student loans early if you earn a high salary, do not have any other debts to pay and do not need to finance other types of loans, like a mortgage, where you might need to use your savings as a deposit.

Let us explain this in more detail:

• You’re a high earner. If your monthly payments are high and you’re set to pay off your student loan in full before the time limit, paying early could save you interest.
• You don’t have any other debts. If you don’t have any outstanding mortgages, credit cards, car finance agreements or personal loans, using spare cash to pay off your student debts could save you money.
• You’ll never need a mortgage or other type of loan. This scenario can be hard to predict, but if you’re very financially secure and you have no intention of taking out a mortgage or loan anytime soon, paying off your student debt could be worthwhile.

Let’s look at the pros and cons of paying off student loans early:

How to pay off student loans early

1. Check your balance. Log in to your Student Loan account on the government website to see exactly what you owe and confirm which plan you’re on.
2. Choose your payment method. You can pay by debit card, cheque or bank transfer.
3. Make the payment. Either pay from within your online account or, if you prefer, use the quick-pay service. For the latter, you’ll only need the borrower’s surname and customer reference number.
4. Keep proof. Download the confirmation so you have a record that the extra payment has been applied.

Avoid parting with all cash at once

You can’t get a refund on any repayments you make, so make sure you still have plenty of money set aside for emergencies and any short-term goals.

If you decide not to pay off your student loan early, think of your monthly repayments as a tax rather than a debt. This won’t make your repayments any cheaper, of course, but it might help you make peace with it.

Remember that if your income falls below your plan’s minimum threshold or you lose your job completely, your repayments will stop. Not only that, your outstanding debt will be wiped after a certain period of time, so no matter what is going on with interest rates, your repayments won’t become unaffordable.