My student loan has increased by 25% in six years… should I pay it off early?

I went to university between 2014 and 2018, which means I am on the type 2 student payment plan.

I borrowed £27,865 for my tuition fees and £13,051 for maintenance, making a total of £40,916.

I started my first ‘real’ job after university in 2018 with a starting salary of £28,000 and have since passed the threshold for making loan repayments.

My salary has increased over the years and is now around £60,000.

I was surprised to discover on my last payslip that my monthly student loan payment is now £250. At first I thought there must be a mistake.

I remember being told at school that it would only be the same amount as a mobile phone contract (between £40 and £50 a month) and that it is canceled after 30 years, so I didn’t worry.

I looked into it further and discovered that my student loan had increased by £10,000, equivalent to a 25 per cent increase, in the six years since I left university. I pay £250 a month and I don’t even cover the interest.

I know the loan will go away 30 years after I left university in 2048, but I’m wondering if I should:

a) Continue paying the monthly payment, wait for the interest to go down and try to forget about it.

b) Start saving money to pay off the loan early and avoid paying interest. For example, save up to make a balloon payment once a year to pay off part of the loan. I guess I’m allowed to do this. radio control

This Is Money’s Angharad Carrick responds: Anyone paying off a student loan will know all too well the feeling of checking their balance and seeing that it has increased by thousands of pounds since graduation.

This is especially true for those who started their course after 2012, when fees increased dramatically from around £3,000 to around £9,000 per academic year.

The first thing to explain is that the student loan system is quite complicated and there are different interest levels depending on the plan you have.

Unlike a standard loan, the system acts more like a “graduate tax” and increases the more you earn. There are currently five different payment plans that will determine when you will pay off your loan and how much you will pay.

When will I pay my student loan?

For those in Plan 2 like you, who went to university between September 1, 2012 and July 31, 2023, you will start repaying your loan once your income exceeds £27,295.

Those who started university before September 1, 2012 will be on Plan 1 and will start repaying once they earn more than £22,015 a year, while those who started after September 1, 2023 will be on Plan 5 and they will start paying when they earn more than £25,000 in a year.

In Scotland, students are on Plan 4 and will start repaying the loan once they earn more than £27,660 a year.

All undergraduate students, regardless of what plan they are on, will pay 9 percent of their income above the threshold, while those with graduate loans will pay 6 percent.

For someone like you earning £60,000 a year, you would pay 9 per cent of the £32,705 you earn above the threshold, which equates to £245 a month.

What interest is charged on student loans?

The level of interest applied to the loan is another issue that has been a bone of contention for many graduates.

These have typically been based on the retail price index (CPI) inflation rate rather than the consumer price index (CPI), which is more commonly used to measure inflation.

However, when the RPI soared to 13.5 per cent in March 2023, the Government introduced a 7.6 per cent cap on all student loans.

The current level of interest in each plan is as follows:

• 7.6% on postgraduate loan scheme

Those earning less than £27,295 only accrue the RPI interest rate, while those earning between £27,296 and £39,130 ​​pay RPI plus up to 3 per cent, as the rate increases the more you earn.

Those earning more than £49,130 ​​are charged RPI plus 3 per cent.

Understandably, to overcome the interest that could accumulate over decades, you might consider paying it off sooner.

We asked two experts for advice on what you should do.

Alice Haine, personal finance analyst at Bestinvest says: No one wants to see thousands of pounds of extra interest, but before you panic and come up with a plan to pay it off, the best strategy for most is to ignore the interest charged entirely.

Instead, simply pay the amount you owe each month and direct your savings toward other financial goals.

The number you should focus on is the amount you need to pay each month. For Plan 2 graduates, this is set at a rate of 9 per cent on everything a student earns above £27,295, the equivalent of £2,274 a month before tax, which effectively means that the amount you owe (your total loans plus interest) Never determine how much you owe each year.

That rule applies to all income from your regular job, whether employed or self-employed, as well as income from investments or savings accounts.

For someone like you who earns £60,000, you pay 9 per cent of the £32,705 you earn above the threshold, which works out to £2,943 a year or around £245 a month.

While it can be discouraging to see what you owe increase rather than decrease with your payments, depending on your future income, you may never pay off what you owe in full, as any outstanding loan balance is erased 30 years later of the first payment. April after graduation.

Ian Futcher, financial planner at Quilter, responds: Can and should I pay off my student loan early? These are two questions that will likely be on the minds of many college graduates, particularly due to the fact that as inflation and interest rates have risen, many will have seen large amounts of interest added to their student loans.

In short, you can make additional payments on your loan, and this is what we would normally recommend with a very high interest loan. However, paying off a student loan early is not that simple.

Student loans are not the same as traditional loans, and before you consider paying more on your student loan, it’s important to have a good understanding of how they work.

You’ve seen over £5,000 in interest added to your loan in just a short period and you certainly won’t be alone.

This can be extremely discouraging and if this were a traditional loan it would make sense to make extra payments to pay off the interest and the loan as quickly as possible, but since this is a student loan this may not be the best course of action. action.

First, it’s important to remember that regardless of how much you owe, what you pay back won’t change: it will always be 9 percent of what you earn above the threshold.

What you pay will only change with what you earn, so if your salary increased to £70,000, your monthly payments would increase to around £320.

Similarly, if your income fell to £50,000, your monthly payments would reduce to approximately £170. So while a growing loan may seem daunting, it won’t affect how much you pay each month.

The second thing to keep in mind is that the loan will be paid off after 30 years, regardless of how much you have paid. This will not be classified as default; That’s just the way the system works.

Let’s imagine that no interest is added. He started with a loan of £40,000, so even if he paid an average of £2,000 a year, it would take 20 years to pay it off.

Once you add interest, the probability of paying it off in 30 years decreases significantly. In fact, the Institute for Fiscal Studies suggests that only 83 percent of people will pay off their student loan before 30 years are up.

So is it worth paying off your loan early? This depends on how much you owe.

If you owe a small amount and could pay off the loan or make additional payments, then it may be worth considering.

But if you owe a much larger amount, as in this case, paying small lump sums or additional amounts won’t change what you pay each year, and if you’re unlikely to pay off the loan in 30 years, there’s a good chance the money will be put to better use. in other things, like saving for the house or saving it for retirement.

Determining whether it is worth paying will depend on your personal financial circumstances, and seeking professional financial advice will be key to helping you decide what is best for you in the long term.

Alice Haine adds: Even higher-income people like you may never pay off the loan in full. While it may be tempting to overpay, your salary may change in the future, so overpaying now may not make sense.

You may be taking a break in your career to raise a family, taking sick time off, working part-time, moving to a lower-paying job – all of these cases could cause your salary to fall below the threshold you must pay. Dying prematurely will also erase the debt.

However, if you are confident that your career will continue to prosper and you expect to earn a very high salary in the future, then it may make more sense to pay off the debt in full, especially if your family is willing to help or overpay. pay off debt more quickly and reduce interest rate charges applied.

None of us can see the future, so for now it would be best to ignore the interest rate, accept the monthly payment, and focus on saving for other key financial goals.

Graduates in the early stages of a career have many financial priorities, such as saving for a house deposit or starting a family, so if it were up to me, I would focus on those.

However, if student loan payments are really bothering you and you’re convinced you’re set up for a successful, well-paying career, go ahead and save to pay off the loan sooner.

But none of us ever know what will happen in the future, so think carefully before committing funds you may need for other things.