Student loans: is paying them off early really worth it? Student loans and financial planning

*[3] **[4] ***[5] ****[6]

NB. A reminder that thresholds and rules can change over time. 

One of the main differences between plans is the repayment thresholds. Repayment thresholds for some loan plans have been frozen for periods of time. While salaries have gradually increased, more earnings have become subject to repayment, creating a phenomenon often referred to as “fiscal drag”.[7] The result? Many graduates see substantial deductions from their payslips, while watching their loan balance continue to grow.  

Why earning more doesn’t always solve the problem

There’s a common misconception that earning more automatically means you’ll pay off your student loan faster. In reality, while higher earnings lead to higher repayments, interest can still outpace those repayments, meaning the overall balance may continue to rise.  

Consider a borrower with a Plan 2 loan earning around £50,000 per year. They could be making annual repayments of around £1,855. However, because the interest rate has also increased, the larger repayment may only slow the growth of the outstanding balance by a relatively small amount. For example, compared with someone earning around £40,000, a borrower earning around £50,000 pays approximately £900 more each year. However, their outstanding balance still increases, albeit by approximately £226 less each year.  

You can see this in practice below. The table assumes a starting Plan 2 student-loan balance of £53,000, with repayments of 9% of earnings above £29,385. Interest ranges from 3.2% to 6.2% depending on earnings, based on an RPI rate of 3.20%. The figures are illustrative rather than a prediction of an individual’s actual loan balance. 

*This illustration is based on the Plan 2 rates applying from 1 September 2025 to 31 August 2026. During this period, interest ranges from 3.2% to 6.2%, depending on income, with rates increasing on a sliding scale between the lower and upper income thresholds. The figures are illustrative and use a £53,000 starting balance.[8]

How do you calculate your student loan repayment?

Earnings aren’t the only thing factored into an individual’s student loan repayment. If you’re required to complete a Self Assessment tax return, certain unearned income, such as dividends, savings interest and rental profits, may also be included when calculating your student loan repayments. However, unearned income is only taken into account if it exceeds £2,000 in a tax year and the borrower receives a Self Assessment return from HMRC. Importantly, once the £2,000 threshold is exceeded, the full amount of unearned income is included in the calculation, not just the amount above £2,000.[9]  

Depending on your circumstances, sources of income needed to be declared on a Self Assessment could include: 

• Savings interest 

• Dividends 

• Investment income (for example interest from savings accounts, dividends from shares held outside an ISA, rental profits from investment properties, and chargeable gains from investment bonds)  

• Chargeable gains from investment bonds 

It should be noted that not all investments need to be declared. For example income and gains within tax-exempt wrappers such as ISAs are generally not taxable.  

With a salary sacrifice pension arrangement, your pension contribution is deducted before your taxable salary is calculated. This reduces your earnings for income tax, National Insurance (NI) and student loans purposes. For plan 2 borrowers, this can be particularly valuable because reducing your income may reduce both your student loan repayments and the interest rate applied to your loan.  

By contrast, relief at source pension contributions are made after your salary is paid. While you still benefit from a tax relief, your earnings for student loan purposes remains unchanged.  

The bond gain trap

Unlike income tax, where top slicing relief can reduce the tax impact of a bond gain, the gain can still affect the calculation of income used for Student Loan repayments. HMRC’s Self Assessment guidance specifically includes chargeable-event gains. 

The wider consequences can be significant. A large bond gain could: 

• Increase the amount of Student Loan repayment due 

• Potentially move a Plan 2 borrower into a higher interest-rate band 

• Increase adjusted net income and affect income-related allowances or benefits 

• Result in an unexpected liability following submission of a tax return 

An example 

Anna is 30 and has around £40,000 of Plan 2 student debt. She is on maternity leave and has a two-year-old child who attends nursery three days a week. Assume Anna’s parents want to give her an investment bond worth £120,000, which has a £75,000 chargeable-event gain. For illustration, assume Anna has no other taxable income or relevant deductions that materially change her adjusted net income, and that the gain arises entirely in the tax year considered. 

The exact impact would depend on Anna’s wider circumstances, including her employment income, her partner’s income, the type of childcare support she receives and the precise tax treatment of the bond. A £75,000 gain could, for example, take her adjusted net income above the £60,000 Child Benefit charge threshold and potentially towards or above the £100,000 threshold relevant to Tax-Free Childcare and the working-parent childcare offer.

It could also increase the income used to calculate her Student Loan repayment. 

An alternative could be for Anna’s mother to surrender the bond herself and gift Anna the resulting cash. However, this is dependent on the mother’s own income-tax position, the tax treatment of the bond gain, the timing of the surrender, the gift’s inheritance-tax implications and her wider estate-planning objectives.  

The key point is that the most tax-efficient outcome cannot be determined from the bond value alone. Student loan repayments, income tax, childcare support and estate planning should be considered together before deciding who should surrender or receive an investment bond. 

The wider implication of family gifts

The same principle as above applies when parents or grandparents are considering a substantial gift to help with student debt. The recipient’s position is only part of the picture. The donor should also consider the potential inheritance tax (IHT) and estate planning implications.  

For example, a £120,000 cash gift could be a potentially exempt transfer. If the donor survives seven years after making the gift, it will normally fall outside their estate for IHT purposes. If they die within seven years, the gift may need to be considered when calculating IHT. Certain exemptions are also available, including the £3,000 annual exemption and, where the relevant conditions are met, gift that form part of the donor’s normal expenditure out of income.[10] 

This means that the decision to use family wealth to clear a student loan should consider both sides of the transaction. For substantial gifts, financial advice can help ensure that the impact on both the recipient and the donor is considered before money is transferred. 

Should you repay your student loan early?

Before anyone rushes to make an overpayment or pay their student loan off in full, it’s important to understand a key principle of the UK student loan system: Student loans are not a conventional debt. Unlike a mortgage, credit card or personal loan, repayments are tied to income. If earnings fall, repayments fall too. If you were to lose your job, you wouldn’t have debt collectors banging your door down.  

Another consideration as to whether someone should repay their student debt early, is whether they are expected to repay the loan in full before its write-off date. Around a third of Plan 2 borrowers are likely to fully repay their loan before the 30 year write-off period. That means the majority will have some or all of their balance written off typically by the time they are in their early 50s. For those borrowers, making large overpayments may not always be the most efficient use of their money. After all, why rush to repay debt that may never need to be repaid in full?

The picture is very different for other loan types. Around 65% of Plan 1 borrowers are expected to clear their debt before any write-off applies, making voluntary repayments a more realistic consideration.[11] Meanwhile, around 55% of Plan 5 borrowers are expected to repay in full.[12] 

Impact on your mortgage 

One key consideration as to whether someone should clear a student loan debt is mortgage affordability. Mortgage lenders take student loan deductions into account when assessing affordability. In theory, clearing a student loan could therefore improve an individual’s mortgage prospects. 

There is also a question of financial resilience. If income falls unexpectedly, student loan repayments stop automatically when earnings drop below the relevant threshold. Mortgage repayments do not. For some individuals and families, using available funds to increase their property deposit and reduce their mortgage borrowing may therefore be more valuable than reducing student debt. 

Higher earners 

High earners also have a few considerations. A borrower with an adjusted net income over £100,000 a year will be making substantial student loan repayments. They will also be handling the 60% tax trap alongside this, complicating things further (you can read more about this here: Earning over 100k? : Tips to avoid the 60% tax trap | Saltus). Adding student loan deductions on top can make the cost of earning additional income chafe even more.   

In addition, high earners are likely to pay their student loan debt in full. This can make interest rates a much more important decision. There have been periods where borrowers have been locked into a low-rate mortgage while their student loan was accruing interest at significantly higher rates. For example, the maximum Plan 2 interest rate reached 7.7% in March 2024 and 8% in August 2024, following a period of high inflation and the application of an interest-rate cap.[13] In those circumstances, clearing the student loan may begin to look increasingly attractive. Not only could it reduce future interest costs, but it could also free up a meaningful amount of monthly disposable income. 

As always, financial advice is recommended before making any decisions.  

So, is it worth paying off your student loan?

As has likely become clear, there isn’t a straightforward answer.   

For lower earners who are unlikely to repay their loan before it is written off, making overpayments may not be the best use of their money. For higher earners who are on track to clear the balance in full, facing decades of repayments and significant interest costs, paying it off early can be far more compelling.  

The same applies to parents and grandparents looking to help. A contribution towards student debt could reduce interest costs and, in some cases, improve future cash flow. However, that money may have a greater impact if directed towards a property deposit, pension or investments. As always, the right approach will depend on individual circumstances, as investments carry risk and may fall in value, while pension funds are generally not accessible until retirement age. 

Ultimately, student loans are not like traditional debt. The right decision depends on your loan type, earnings, likelihood of benefiting from a write-off and broader financial goals. In many cases, that’s where financial advice can add real value.