University can be expensive and many of us step out into the world with a big debt already hanging over our heads. So naturally, once we’re financially able to think about it, a lot of us wonder: “Should I pay off my student loans early?” Loqbox explores if you should pay off student loans early, how much you should pay or whether you should invest instead?
Before you decide if you should pay off your student loan early, think about your financial situation. What are your expenses, your income, your savings, and financial goals looking like? Do you have an emergency fund in place, and are you paying into any retirement savings? It’s tempting to clear debts, but some may actually be worth keeping if you could make more money in other ways in the meantime. Student loans for Bachelor degrees could be one of those.
How much student loan should I pay?
How much student loan you should be paying depends on when you started your degree, because your loan repayment type will depend on that. Check your student loan type and repayment plan here. Generally, whatever plan you’re on, you won’t start repayments until the April following your graduation, and only when you earn more than about £21,000-27,660 per year (before tax and deductions).
Once you meet the requirements for repayment, you’ll typically pay around 9% of anything you earn over that threshold (6% if you’re paying off a Postgraduate loan). And if you are employed and paid via the PAYE scheme, the money is usually taken from your pay before you get hold of it, like tax and National Insurance payments.
Student loans are different from other borrowing, like mortgages, credit cards, and personal loans, because what you pay depends on how much you earn. Your repayments are proportional to your salary and you’ll only have to pay anything if you’re earning enough in the first place.
Should I pay off my student loan or invest?
If you’re already in a good financial situation and you have enough money to start thinking about saving or investing, you might be wondering whether you should pay off your student loans first, or invest. Once you’ve worked out what sort of student loan you have, and what your repayments are, you can start to weigh up your options.
Consider the potential returns on your investments. If you can earn a higher return investing than the interest rate on your student loan, it might be more advantageous to invest rather than pay off the loan early. But, as always with investing, keep in mind that investments carry risk. You could end up with less money than you started with.
So it may be better to keep your student loan running and save or invest instead. If you’re not going to pay off your full loan before it times out, you could be better off putting any extra money you have towards your savings goals (like a deposit for a house) or an emergency fund to deal with life’s curveballs!
If you have debts other than your student loan, you should definitely consider paying them off first. The interest rates that you pay on your standard loans will likely be much higher than the interest you earn on your savings or pay on your student loan, so prioritise paying them off first and foremost.
When should I pay my student loan?
You won’t have to start paying off your student loan until the April following your graduation, at the earliest, and even then only if you’re earning more than £21,000-27,660 a year (depending on when you started higher education). It’s also worth checking the terms of your student loan as they are sometimes written off 25-30 years after your graduation, depending on your plan.
If you don’t earn above the threshold, or ever drop below it, you don’t pay anything towards your loan. And if your terms state that your loan is waived after a few decades, regardless of how much you’ve repaid, you would stop paying altogether.
So, to answer when you should pay your student loan, the answer is from April after graduation and every month you earn above the threshold, for 25-30 years (depending on your repayment plan).
Should I pay off my student loan or grow my credit score?
Student loans don’t affect your credit score in a direct way. They aren’t like other forms of credit because they don’t show on your credit history. However, if you apply for another loan, like a credit card or a mortgage, the lender may separately consider your student loan when assessing your application.
Your credit score is a handy number that summarises how creditworthy you seem to lenders when they look at your credit report. Generally, the higher your score, the more creditworthy you appear, and the more likely you’ll be accepted for borrowing. It can also improve interest rate deals you’re offered and save you thousands in the long term.
If you’re not sure what your three credit scores are (yes, you have three, not just one), you can take a peek for free using one of these recommended services:
ClearScore (uses Equifax data)*
Credit Club (uses Experian data)
Intuit Credit Karma (uses TransUnion data)
*For transparency, we wanted to let you know that ClearScore pay us a small commission if you sign up using this link.
Fortunately, whether you pay off your student loan or not, you can still grow your credit score to take advantage of those savings. The quickest way is by getting started with Loqbox to access Loqbox Grow, Loqbox Save and Loqbox Rent for just £2.50 a week. Your credit score could grow by up to 300 points in the first three months using all of three products together.
Improvements to your credit score are not guaranteed.
You can read more about what can affect your credit scores and how to improve them here.
So, should I pay off my student loan early?
It really depends on when you started your degree, what your financial circumstances are, and what other options you have available to you.
Student loans are relatively easy to manage, especially when compared to other debts. So, perhaps you’d benefit more in the long run by focusing on your savings goals, clearing your other debts, or investing.
But an interesting thing to remember is that if you earn below the threshold, you don’t make repayments and the debt is written off eventually, so paying it off in one go could mean repaying money that you would have never had to part with.
However, if you do pay it off you’ll relieve yourself of the burden of a debt and free up more money each month for other goals. The choice lies with you and what you’re comfortable with.
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