My student loan has increased by 25% in six years… should I pay it off early?

I studied at university between 2014 and 2018, which means I have a type 2 study repayment plan.

I borrowed £27,865 for my tuition fees and £13,051 for maintenance, making a total of £40,916.

I started my first ‘proper’ job after university in 2018 with a starting salary of £28,000 and have since gone over the hurdle of paying back loans.

My salary has increased over the years and is now around £60,000.

I was shocked to discover on my last pay slip that my monthly student loan repayments are now £250. At first I thought there must be a mistake.

I remember being told at school that it would only be the same amount as a mobile phone contract (£40-£50 per month) and that it would be wiped out after 30 years, so don’t worry about it.

I looked into it further and discovered that my student loans had risen by £10,000 in the six years since I left university, which equates to a 25 per cent increase. I pay €250 per month and I don’t even pay the interest.

I know the loan will be forgiven thirty years after I leave college in 2048, but I’m wondering if I should do the following:

a) Keep paying the monthly payment, hope the interest rate drops and try to forget about it.

b) Start saving money to pay off the loan early to avoid paying interest. For example, save to pay a fixed amount once a year to pay off part of the loan. I guess I can do this. R.C

Angharad Carrick from This Is Money replies: Anyone paying back a student loan will know all too well the feeling of checking their balance only to see that it has risen by thousands of pounds since graduating.

This is especially true for those who started their course after 2012, when costs increased dramatically from around £3,000 to around £9,000 per academic year.

The first thing to explain is that the student loan system is quite complicated and there are different interest levels depending on which plan you have.

Unlike a standard loan, the system acts more like a “graduation tax” and increases the more you earn. There are currently five different repayment plans that determine when you repay your loan and how much you pay.

When do I pay back my student loan?

For those on Plan 2 like you, who went to university between September 1, 2012 and July 31, 2023, you will start repaying your loan once your income exceeds £27,295.

Those who started university before September 1, 2012 will be on Plan 1 and start repaying once they earn more than £22,015 per year, while those who started after September 1, 2023 will be on Plan 5 and start paying back when they are in earn more than £25,000 a year. year.

In Scotland, students follow Plan 4 and start paying back the loan once they earn more than £27,660 a year.

All students, regardless of the plan they follow, pay 9 percent of their income above the threshold, while those with postgraduate loans pay 6 percent.

For someone like you who earns £60,000 a year, you will pay 9 per cent of the £32,705 you earn above the threshold which works out to £245 a month.

What interest rates are charged on student loans?

The level of interest applied to the loan is another issue and one that is a point of contention for many graduates.

These are typically based on the retail price index (RPI) inflation rate rather than the consumer price index (CPI), which is more commonly used to measure inflation.

However, when the RPI rose to 13.5 percent in March 2023, the government introduced a 7.6 percent cap on all student loans.

The current interest level for each plan is as follows:

• 7.6% on the postgraduate loan plan

Those earning less than £27,295 will simply accrue the RPI rate in interest, while those earning between £27,296 and £39,130 ​​will pay RPI plus up to 3 per cent, as the rate rises the more you earn.

Those earning more than £49,130 ​​will pay RPI plus 3 per cent.

Understandably, to beat the interest that can accumulate over decades, you might consider paying it off sooner.

We asked two experts for their advice on what to do.

You pay back 9% of your income to repay your student loan

Alice Haine, personal finance analyst at Bestinvest says: No one wants to see thousands of dollars in extra interest, but before they panic and come up with a plan to pay off the interest, the best strategy for most is to ignore the interest applied altogether.

Instead, simply pay the amount you owe each month and focus your savings on other financial goals.

The number you need to pay attention to is the amount you have to pay back each month. For Plan 2 graduates this is set at a rate of 9 per cent on anything a student earns above £27,295, the equivalent of £2,274 per month before tax, which essentially means the amount you owe (your total loans plus interest) Never determine how much you have to repay annually.

This rule applies to all income from your regular job, whether you are employed or self-employed, but also to income from investments or savings accounts.

For someone like you who earns £60,000, you’ll pay 9 per cent of the £32,705 you earn over the threshold, which works out to £2,943 per year or around £245 per month.

While it can be discouraging to see what you owe increase rather than decrease with your payments, depending on your future earnings, you may never fully understand what you owe as any outstanding balance of the loan is wiped out 30 years after the first time. April after graduation.

Ian Futcher, financial planner at Quilter answers: Can and should I pay off my student debt early? These are two questions that will likely be on the minds of many college graduates, especially due to the fact that as inflation and interest rates have risen, many will have added large amounts of interest to their student loans.

In short, you can make additional repayments on your loan, and this is what we usually recommend for a loan with a lot of high interest. However, paying off a student loan early is not that easy.

Student loans are not the same as traditional loans, and before you look at the option of paying extra for your student loan, it’s important to understand how they work.

You’ve added more than £5,000 in interest to your loan in just a short time, and you certainly won’t be alone.

This can be extremely intimidating and if this was a traditional loan it would make sense to make additional payments to pay off the interest and loan as quickly as possible, but since it is a student loan this may not be the best course of action .

First, it’s important to remember that no matter how much you owe, what you pay back won’t change – it’s always 9 percent of what you earn above the threshold.

Quilter’s Ian Futcher says paying off your loan early depends on how much you owe

What you pay only changes with what you earn, so if your salary increased to $70,000, your monthly payments would increase to about $320.

Likewise, if your income were to drop to $50,000, monthly payments would drop to around $170. So while an increasing loan amount may seem daunting, it won’t affect the amount you pay each month.

The second thing to keep in mind is that the loan will be wiped out after 30 years, regardless of how much you have paid back. This does not count as standard; it’s just the way the system works.

Let’s imagine that no interest has been added. You started with a £40,000 loan, so even if you paid an average of £2,000 a year, it would take 20 years to pay off the loan.

Once you add interest, the chances of paying it off within 30 years decrease significantly. In fact, the Institute of Fiscal Studies suggests that only 83 percent of people will ever pay off their student loans before 30 years are up.

So is it worth paying off your loan early? This depends on how much you owe.

If you owe a small amount and can pay off the loan or make additional payments, this may be worth considering.

But if you owe a much larger amount, as in this case, paying small amounts or additional amounts won’t change what you pay each year. If you are unlikely to pay off the loan within thirty years, it is very likely that the money will be put to better use elsewhere, such as saving for a house or putting away for retirement.

Determining whether it is worth paying will depend on your personal financial circumstances, and seeking professional financial advice will be crucial in deciding what is best for you in the longer term.

Alice Haine adds: Even higher earners like you may never fully pay off the loan. While it may be tempting to overpay, your salary may change in the future, so overpaying now may not make sense.

You may need to take a career break to start a family, take time off due to illness, work part-time, move to a job with a lower salary – all cases where your salary may fall below the threshold where you should refund. Premature death will also wipe away debts.

However, if you are confident that your career will continue to flourish and you expect to earn a very high salary in the future, then it may make more sense to pay off the debt in full, especially if your family is willing to help or too much to pay. to pay off the debt more quickly and reduce the interest charges applied.

None of us can see into the future, so for now it might be better to ignore the interest rate, accept the monthly payment, and focus on saving for other important financial goals.

Graduates in the early stages of their careers have many financial priorities, such as saving for a home deposit or raising a family, so if it were up to me I would focus on those.

However, if student loan payments are really bothering you, and you’re convinced you’re ready for a successful, high-paying career, go ahead and save to pay off the loan sooner.

But none of us ever know what will happen in the future – so think carefully before freeing up money you might need for other things.