Worked examplesStudent loans
Should you overpay your student loan? For many graduates, it costs tens of thousands
A student loan feels like a debt to clear. For many graduates it works more like a tax, and paying it off early only shrinks the amount that would have been written off. Here's how to tell which you are.
The short answer
−£38,077
is the extra cost of overpaying £200 a month on this loan.
A Plan 2 graduate on £45,000, owing £55,000, is on course to have £93,808 written off in 2048. Overpaying just shrinks that.
The working
- Repaid on normal repayments
- £36,849
- Repaid if overpaying £200 a month
- £74,926
- Extra cost of overpaying
- −£38,077
- Investing the £200 instead, by 2048
- +£53,605
In today's money, assuming pay rises of 3% a year and investment growth of 5%.
Watching a student loan balance rise every year, even while you're repaying, is enough to make anyone want to throw money at it. Before you do, it's worth understanding how the loan actually works, because for many graduates overpaying is one of the most expensive things they can do with spare cash.
Repayments depend on pay, not on what you owe
You don't repay a set amount. You repay a percentage of your pay above a threshold, whatever you owe. For a Plan 2 loan (most people who started university in England between 2012 and 2023):
£1,405
repaid this year on a £45,000 salary, whatever the balance.
About £117 a month, the same on £20,000 owed or £100,000.
The working
| Plan 2, salary £45,000 | |
|---|---|
| Pay over the £29,385 threshold | £15,615 |
| Repayment rate | 9% |
| Repaid this year | £1,405 |
Why the balance keeps growing
Plan 2 interest depends on your pay: inflation (RPI) on lower incomes, rising to RPI plus 3% on higher ones, and currently capped at 6% until August 2027.
| On a £55,000 balance | |
|---|---|
| Interest added (6%) | +£3,300 |
| Repaid | −£1,405 |
| Balance up by | £1,895 |
It looks alarming. But because what you repay depends on your pay rather than your balance, a bigger balance often just means a bigger amount written off at the end.
When overpaying costs you
Take a graduate with a £55,000 Plan 2 balance, earning £45,000, who first had to repay in 2018. Assume their pay rises by 3% a year.
On normal repayments, they repay about £36,849 in today's money before the loan is written off in April 2048, 30 years after they started repaying. Around £93,808 is written off.
Now suppose they overpay £200 a month:
| Normal repayments | Overpay £200 a month | |
|---|---|---|
| Loan cleared | Written off 2048 | Cleared 2048 |
| Total repaid (today's money) | £36,849 | £74,926 |
Overpaying does clear it, but it costs £38,077 more than letting it be written off. If they invested the same £200 a month at 5% a year instead, they'd be about £53,605 better off by 2048.
When overpaying makes sense
The picture changes completely if you'll repay the loan in full anyway. Then every pound you overpay saves interest, just as it does on a mortgage.
A graduate on £65,000 with a £45,000 Plan 2 balance is on track to clear it by 2044, before it would be written off. Overpaying £200 a month clears it in 2036, and because the 6% interest is higher than the 5% the money would earn invested, they end up about £2,935 better off than investing.
The test: will you clear the loan before it's written off? If yes, overpaying can pay. If no, it usually doesn't.
That's simple to say and harder to work out, because it depends on your pay for decades. A career break or going part-time can turn a loan you'd have repaid into one that's written off. A run of big pay rises can do the opposite.
Repayments come out of bonuses too
Because repayments are 9% of pay over the threshold, they take a slice of every bonus and pay rise. For a Plan 2 graduate on £100,000, that 9% on top of the 60% band leaves just 29p of each extra pound. The bonus worked example shows how bonus sacrifice into a pension avoids it.
If the aim is to put spare money to work, it's worth comparing overpaying with the other options. For many people, paying into a pension instead of overpaying the mortgage comes out ahead for the same reason: tax relief is a head start.
Know your plan
| Plan | Who | Repay 9% of pay over (2026/27) | Written off after |
|---|---|---|---|
| Plan 1 | England and Wales, before Sept 2012 | £26,900 | 25 years |
| Plan 2 | England and Wales, 2012 to 2023 | £29,385 | 30 years |
| Plan 4 | Scotland | £33,795 | 30 years |
| Plan 5 | England, from Aug 2023 | £25,000 | 40 years |
| Postgraduate | Master's and doctoral loans | £21,000 (6%) | 30 years |
The Plan 2 threshold is frozen at £29,385 until April 2030, so every pay rise between now and then means bigger repayments. Your plan is shown on your payslip and in your online repayment account.
For parents: your child's loan
If your child started university in England from August 2023, they're on Plan 5: 9% of pay over £25,000, for up to 40 years. A graduate with a £50,000 balance starting on £30,000 would repay about £450 a year at first. Over 40 years, with pay rising 3% a year, they'd repay around £20,120 in today's money, and about £109,604 would be written off in 2067.
So paying off a child's loan upfront, or helping them avoid one, can cost far more than they would ever repay. For a future high earner it's a different story, so run their numbers first.
General information, not financial advice. Projections assume pay rises of 3% a year, RPI of 3% from 2027, investment growth of 5% a year and inflation of 2.5%, using current plan rules. Investments can fall as well as rise.