Is it worth paying off a student loan early?
Experts say in many cases early payments won’t save you money in the long run
Interest rates on student loans are set to be capped to stop soaring inflation adding thousands of pounds to graduates’ repayments.
The Times said ministers plan to change the way that rates are calculated after the Institute for Fiscal Studies warned of “eye-watering” rises that would push maximum interest rates for higher earning graduates from 4.5% to 12%.
As the cost-of-living crisis intensifies, fears of dramatic rises in repayments have led more graduates to consider paying off their loans early. Although it would be a weight off your mind, experts say this step is often not the best use of your cash.
The “simple question spilling from the lips of over four million former graduates” is whether they should pay off their student loan early, said Money Saving Expert Martin Lewis. The answer, he explained, “depends on whether you’ve other debts and when you studied, as that dictates your interest rate” but in most cases the answer will not be a resounding yes.
He concludes that “based on the maths, only those with pre-1998 loans who definitely won’t need to borrow should be racing to repay their student loans”.
Lewis explains that, unlike normal borrowing, which requires payment regardless of your situation, with student loans you don’t need to repay them unless you’re earning over a set amount.
This means that “if times get tough” and you lose your job or your income drops, then “unlike any other lenders, the student loan company won’t come knocking on your door” because “you quite simply don’t need to repay”.
He also reminds readers that student debt is wiped after 30 years (on average), or if you die. This is an “important fact to consider”, he says, because “it means there is a chance that after you overpay, you may then stop earning over the threshold, die or be incapacitated, so will have unnecessarily repaid debt that you didn’t need to”.
Which? magazine also advises caution. In theory, making voluntary student loan payments means “you’ll clear your debts earlier, but if you’re one of the majority who can expect to make repayments for 30 years, this won’t save you any money in the long run”.
The consumer group adds that “optional repayments will only really make sense if they let you clear your loan in full, or put you within touching distance of doing so”, because “unlike other types of loans, an overpayment won’t reduce the amount you repay each month”.