Should I pay off my student loan? UK Plan 2 - April 2023.

There are several factors to consider when making this decision, including the current interest rate, the impact on your credit score, and your overall financial situation.

For graduates who took out a Plan 2 student loan in England, the current interest rate for April 2023 is 6.9%. This is due to go up to 7.3% in June as the interest rates follow the level of inflation in the UK.

When considering whether to pay off a Plan 2 student loan, one important factor to consider is your income. Graduates are required to start repaying their loans when they earn over a certain amount. The repayment threshold for Plan 2 loans is currently £27,295 per year, and graduates are required to pay back 9% of their earnings above this threshold.

If you are not a high earner, it is unlikely that you will ever fully pay off your student loan, and any extra payments you make may not be worth the cost. One reason for this is that Plan 2 student loans are structured differently from other types of debt. Unlike traditional loans, there is no fixed term for repayment, and the amount you owe is not fixed either. Instead, the amount you repay each month is based on your income, and any remaining balance is written off after a set period of time. For Plan 2 loans, any outstanding balance is written off after 30 years. As a result, it is unlikely that you will ever fully repay your student loan before the remaining balance is written off. In this case, making extra payments on your student loan may not be worth the cost, as you will not see a significant reduction in your overall debt.

However, if you are a high earner, and it is likely you will pay off the full amount before the loan is written off, it is highly recommended you try to pay it off as quickly as possible. Due to rising interest rates, your loan will grow quickly and over time, become harder to pay off. For example, if you have a student loan of £40K and you earn £60K then your monthly repayments would be £245 which is barely paying the interest on the loan (taking the current interest rate of 6.9%). If you have 25 years left before the loan is written off, you will pay approximately £33.5K more than your total loan amount. These calculations are made assuming you will earn £60K for the next 25 years. If you earn more, you'll pay even more in interest over time. Therefore, it is advisable that you make over payments each month or pay a lump sum if you can to pay off the loan quicker, thus saving a lot of money in interest. For example if you pay an additional £355 towards this loan (making the total monthly repayment £600), then you will pay it off in just over 7 years and save about £22K in interest!

There are some other factors where it may make sense to pay off your student loan early. For example, if you are planning to apply for a mortgage, paying off your student loan may improve your chances of being approved, as it will reduce your overall debt-to-income ratio.

In conclusion, whether to pay off a UK Plan 2 student loan or not is a complex decision that depends on your individual financial situation. As the interest rate on Plan 2 loans increases, it is important to consider your income and the likelihood of ever fully paying off your loan.

Feb 15, 2023 | TTN
Disclaimer: The tools and information on this site do not constitute financial advice. Please do your own research before making any financial decisions.
If you found my tool useful, please support me! It can be any amount like £3, I'll treat myself to a nice herbal tea!