Your student loan may be cheap but it can also be an enormous millstone saddling you with a very large piece of unsecured debt for years or even decades. While the temptation may be to put a student loan to the back of your mind after you graduate, it is always good policy to look at reducing debt even if the interest payments seem very low. But is it the right decision for your circumstances and how do you go about repaying a student loan early?
Why you should pay off your student loan as soon as you can
Student loans are very large pieces of unsecured borrowing. If your course fees are the maximum £9,000 a year, then you may be sitting on a loan of £27,000. You may have also borrowed your living expenses in which case your debt could be much larger (see our infographic about this). Interest rates are low compared with other types of borrowing – 0.9 per cent for those who took out loans before 2012 and up to 3.9 per cent for those who borrowed after that. But given the lifetime of the average student loan – which only starts to be repaid once your in-work income goes above a particular threshold – not repaying it as soon as you can will result in high total interest repayments.
Starting to repay your student loan as soon as you can will reduce the length of the repayment term and mean that you will pay less interest over the lifetime of the loan. Unlike many other forms of borrowing, student loans do not come with early repayment charges which means that you won’t face any other costs if you make an effort to start clearing the debt.
How do student loan repayments work?
As we’ve already mentioned, there are two types of student loans: those taken out before September 1, 2012 and those taken out after that date.
Loans taken out before September 1, 2012.
With this loan, you will have started to make repayments from the April after you finished your course. Those repayments only kick in when you start making over a certain amount in a job: if you earn more than £17,495 then 9 per cent of your salary goes in repayments. These repayments are automatically deducted from your salary if you are on PAYE.
Loans taken out after September 1, 2012
With these loans, you start repayments in the April four years after you started your course or in the April after you graduate or leave college. Those repayments kick in when your salary goes over £21,000 a year and are automatically deducted from your pay packed if you are on PAYE. The repayments will be 9 per cent of your salary over £21,000.
If you don’t have other debts, then it’s prudent to make an effort to clear your student loan as soon as practicably possible.
However, it’s very likely that you ran up other debts in college to pay for accommodation, food and other living expenses. If so, then your student loan will be just one of a group of debts some of which will have higher interest rates and shorter repayment schedules.
In which case, your student loan will be the cheapest of all your debts and it may be more sensible in this case to actually put the extra money into a savings account. That may be a challenge in this era of very low interest rates but there are still a few savings accounts out there which offer higher rates of interest than you’re being charged on your student loan if you took it out before September 2012.
Saving up and accruing interest in this way will mean that you’ll be able to put down a deposit on a house or pay off your student loan in one go in a few years’ time.
If you do want to pay it off early
If you do have the money to spare and don’t want to use it for something else, then it is relatively easy to make extra payments on your student loan.
The Student Loans Company will allow you to make extra payments with either a debit or credit card so long as these are for a minimum of £5. If you pay by credit card, you’ll be charged an extra 1.5 per cent of your payment. Alternatively, you can send a cheque or postal order the Student Loans Company at Finance Department, Student Loans Company Limited, 100 Bothwell Street, Glasgow G2 7JD. Ensure you write your student support number on the back of the cheque. You can also set up a direct debit or standing order by contacting the lender.
- Borrowing if you still have student debt
- The true cost of being a student
- A young person’s guide to borrowing money