When it comes to student finance and repaying your student loans, the process can often feel confusing and a bit overwhelming at times. There can be so many different elements to wrap your head around, from the different repayment plans to the thresholds and interest rates.
However, what you won’t typically be told about is what the consequences of having this student debt are and whether it’s a better idea to get your student loan paid off earlier than needed. In this article, we’ll look at exactly that and answer other burning questions you might have.
In short, no. In most cases, it’s not worth repaying your student loans early, although this might depend on your situation and other factors. This is because the vast majority of students, estimated at 83% will never end up fully paying off their student loans. As you may never fully repay your student loans before this debt gets cancelled, repaying it early would simply make you pay more than you would end up needing to.
Continue reading to learn more about what the pros and cons of repaying your student loans early may be. This article will particularly look at the process of repaying your student loans and whether having student loans can affect your ability to get other loans.
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Is it worth repaying student loans early?
In most cases, it isn’t worth repaying your student loans early. However, it can depend on your situation, the loan repayment plan you’re on and a range of other factors.
First of all, the most important thing when looking at whether or not it’s worth repaying your student loans early is looking at whether you would have ended up repaying them off in full anyway. As we look at in greater detail later on in this article, student loan debts are eventually cancelled and many students never end up repaying their student loans in full by the end of this period.
Therefore, to figure out if repaying your student loans early is worth it, you will need to figure out whether you are likely to end up repaying it all in the first place. To do this, you’ll need to consider how your salary might grow between when you would repay it early and when you would be due to finish repaying. For more information about this, check out this article by Nerd Wallet.
Also, if you have other debts, it’s best to repay these before trying to repay your student loans early. This is because it’s best to repay your loans with the highest interest rate first and particularly if you have a mortgage, overdraft or credit card, these debts are likely to have much higher interests rates.
Due to this, it isn’t worth it to pay back your student loans early and instead you should focus on paying back other loans. This is particularly if you are on Plan 1 or Plan 4.
For Plan 2, Plan 5, and the postgraduate loan repayment plan, the interest rates may be higher than other debts’ interest rates, such as mortgage loans. Despite this, due to how a student loan is repaid, you still may not end up actually repaying this interest by the time your debt is cancelled.
Continue reading to learn more about the repayment plans.
How long do you have to repay student loans?
As mentioned, when outlining the different repayment plans at the end of this article, how long you have to repay your student loans will depend on which plan you’re on. This ranges from 25 years to 40 years, as of 2023.
However, unlike a typical loan, this time period is how long student loan repayments will be taken from you until this debt is forgiven, rather than a deadline for you to fully repay this debt by. This has a strong impact on the answer of whether you should repay your student debts early.
This is because, you won’t have to pay off your student loans for the rest of your life, regardless of whether you choose to pay them off early or if you simply follow the process and either pay it off naturally or due to it being eventually cancelled. As a result, this makes it less worthwhile to pay off your student loans early.
What happens if you don’t repay student loans back?
If you don’t fully repay it, your student debts will eventually be cancelled between 25 years and 40 years after you were due to repay or when you reach the age of 65. Many students will never end up repaying their student loans in full.
In fact, it is estimated that as much as 83% of graduates will never earn enough to fully repay their student loans. Due to this, it can be thought of as more of a tax on former students, rather than an actual loan. This shows that it isn’t really worth it to pay off your student loans early as you may never end up fully doing so.
For more information about this, check out this Think Student article. You can also look at this Think Student article to learn more about why former students may not need to repay their student loans at all.
Do student loans help or hurt your credit?
When looking at whether you should pay off your student loans early or not, it’s important to look at more than just the details of the repayment plans but also about their wider impacts on your life. This is particularly in the form of financial impacts.
As a student loan is still a loan and a form of debt, it makes sense for you to have questions about how this will affect your credit and your ability to get other loans.
Simply put, student loans neither help nor hurt your credit. In fact, they have absolutely no bearing on your credit rating.
This is because they are unlike other types of loans and won’t appear on your credit file. This is most likely due to their nature as they are paid to the government rather than a private organisation, such as a bank, and they are taken directly from your earnings in a more similar way to taxes.
For more information about whether your student loans will affect your credit, check out this guide by the government.
As it won’t affect your credit, this also means that there is less reason for you to want to repay your student loans early. This is because it won’t burden you in this regard.
Do student loans affect mortgage UK?
As previously mentioned, having a student loan won’t affect your credit in any way. However, when it comes to things like a mortgage, there is more that comes into consideration than just your credit score.
For this reason, having a student loan can affect you when getting a mortgage in the UK. This is particularly in terms of how much you will be able to borrow when getting a mortgage.
This is because mortgage lenders do “affordability” tests to ensure that the customer will be able to afford to make their mortgage repayments. In these, the mortgage lender will be looking at the applicant’s income and their expenses. From here they will be weighing up just how well the applicant will be able to make mortgage repayments, by considering both the current interest rate and hypothetical higher rates in case it was to increase.
As a student loan is already taking from your income, it counts as an expense. This might be a problem as it will reduce the amount that you have available to be able to make these mortgage repayments.
As a result, the mortgage lender may not offer you as much for a mortgage. For more information about this, check out this article by Money Saving Expert.
As a student loan can make getting a mortgage harder, you might feel that it is best and worth it to pay off your student loan early.
What are the student loan repayment plans in the UK?
As you will have seen whether it’s worth repaying your student loan early will depend on a variety of factors, including your personal situation and more importantly, which student loan repayment you’re on. Due to this, in order to properly understand whether it is worth repaying your student loans early or not, you’ll need to first properly understand the different plans.
In the UK, there are 5 different loan repayment plans that students can be on. These are Plan 1, Plan 2, Plan 4, Plan 5 and the postgraduate loan repayment plan.
Look at the following sections that will give you a little bit more information about what these plans are and how they affect students differently. The following information is sourced from this Think Student article that explains in much greater detail what these plans are and how student loan repayments work.
You can also look at this guide on the government website for more details and particularly more information about Plan 5. Please note that the following figures are true at time of writing (September 2023) and may have changed slightly if reading at a later time.
What is the Plan 1 student loan repayment plan in the UK?
This repayment plan is for undergraduate and postgraduate students, who are from Northern Ireland or just undergraduate students from England or Wales that started their course before September 2012.
For this plan, you will need to make repayments of 9% of your income that is over the threshold of £22,015 per year or £413 per week. The interest you will pay in total will be 6.25% of your loan and the debt will be cancelled after 25 years, or when you turn 65, if you received the loan before September 2006.
What is the Plan 2 student loan repayment plan in the UK?
This repayment plan is for undergraduate students in Wales, who started their course since September 2012 and for undergraduate students in England, who started between September 2012 and July 2023.
For this plan, you will need to make repayments of 9% of your income that is over the threshold of £27,295 per year or £524 per week. The interest you will pay on your total loan would be 7.3% and the debt will be cancelled 30 years after you were first due to repay.
What is the Plan 4 student loan repayment plan in the UK?
This repayment plan is for both undergraduate and postgraduate students from Scotland. For this plan, you will need to make repayments of 9% of your income that is above the threshold of £27,660 per year or £532 per week.
The interest you pay on the total loan is 6.25% and this debt will be cancelled after 30 years.
What is the Plan 5 student loan repayment plan in the UK?
This is for undergraduate students in England, who started their course after August 2023. For this plan, you will need to make repayments of 9% of your income that is above the threshold of £25,000 per year or £80 per week.
The total interest on the loan is 7.3% and the debt will be cancelled after 40 years from when you are first due to repay.
What is the postgraduate student loan repayment plan in the UK?
This is for postgraduate students, who studied either a master’s degree or doctoral degree from England or Wales. For this plan, you will need to make repayments of 6% of your income that is above the threshold of £21,000 per year or £403 per week.
The total interest of your loan is 7.3% and this debt will be cancelled 30 years after you were due to start repaying.