Paying off my student loan early

Published February 29, 2020

I have just paid off my student loan early.

Why did I pay off my student loan early?

The advice for choosing whether to pay off a student loan early is confusing, because it depends on your personal situation as well as the exact loan you have. Pre-2006 loans are different to 2006-2012 loans, which are very different from post-2012 loans.

Personally for me, the choice is easy:

  • Over the course of my life, I will pay back my pre-2006 loan in full.
  • My plan 1 loan has an interest rate of 1.75%.
  • I have money sat in savings accounts accruing interest at rates of less than 1.75%
  • I am paying tax on my interest from savings, so my return rate is actually less than the advertised rate.

So essentially I'm being taxed twice. Once on my income in the form of a student loan, and again on my savings. Therefore I can reduce my tax rate by paying off the loan.

Should you pay off your loan early?

Not necessarily, and quite likely no.

The student loan is quite unusual as far as debt goes in that it's quite cheap (the interest rate is low), and, depending on your exact loan, it may get written off after a period of time.

The newer loans (2012 onwards) are not designed to be paid off for most people, and effectively act as more of a graduate tax rather than a debt. For many people, it may be more expensive to pay them off early than to simply accept the higher tax rate.

For loans between 2006 and 2012, the choice is more dependent upon your personal situation. If you are earning a lot and have spare cash, it probably makes sense to clear your student debt, unless you have other more expensive debts (like credit card debt), which you should clear first.

It's a complex situation with many variables, and to run through all the considerations would take some time.

Martin Lewis has some discussion on the matter, though it's not exhaustive.

How do you do it?

Unfortunately, you have to phone up the Student Loans Company to request a settlement figure. They won't necessarily have an up to date account of your balance, because they don't receive PAYE deductions directly - it goes through HMRC, and there may be a delay in the SLC receiving the information from HMRC.

You will need:

  • Your Customer Reference Number
  • Your "secret question" answer
  • Any recent payslips - potentially up to the last 12 months - to advise them of any payments since they were last informed by HRMC.

Contact information is on the gov.uk website

Filed under: student loan, finance
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