3 tips for paying off student loans early

If you are someone that would benefit from paying off your loans early, here a few useful tips.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you’re one of the many people who left university with student loan debt, you might be considering paying the debt off early. But is it really worth it?

Well, the truth is that the student loans system is quite unique, and trying to pay your debt off early might not be the best course of action.

If you are on Plan 1, your loan will not attract a real rate of interest. The interest rate is matched to the rate of inflation, meaning that the true value of the amount you owe will always be equal to the amount you borrowed.

However, with interest tracking inflation, whether you choose to overpay or not, you will still pay back exactly the same amount. There’s nothing to be gained by overpaying, which may make doing so rather pointless. You can read more here about whether it’s best to repay your student loan right now.

With that said, there are unique circumstances in which it might actually benefit you to pay off your student loan early. If you are on Plan 2 and currently in a high earning job that you are likely to remain in for the foreseeable future, paying your debts off could make sense.

On Plan 2, your interest rate is not solely linked to the rate of inflation.

  • While studying, the interest rate is the retail price index (RPI) +3% until the April after you graduate.
  • When you get a job, if you earn under £25,725, the interest rate will be just the RPI.
  • If you earn over £46,305, the interest rate will be the RPI + 3%.
  • If you earn between £25,725 and £46,305, the interest rate will be a figure somewhere between the RPI and the RPI + 3%.

The overall implication is that if you are a higher earner on Plan 2, there is an actual cost for your loan and it may make sense to pay it off early.

Here are some tips to consider if you think you could benefit from paying off your debts early.

Pay more than the minimum

Increasing your monthly repayment could help you pay your loan much faster and clear it earlier. How? First, the total loan will reduce by each pound you add to your payment. Secondly, your total bill will be reduced by the interest that you would have been charged if you had not paid extra. Depending on how much you overpay, you could take anything from a few months to a number of years off the time it will take to repay the loan in full.

You might find creative ways of coming up with extra money to add to your loan repayment. For example, you might choose to forgo a few night outs with friends each month and add the savings to your loan repayment. On top of this, you could take out a cashback credit card and add your cashback to your student loan repayment. For this option, however, be careful not to overcharge the card in pursuit of more cashback to pay off your student debt, as this might put you further in debt. 

It is advisable to only make extra payments that you can afford. You don’t want to add so much to your payments that it ends up massively altering your lifestyle or financial wellbeing. 

Make more frequent payments

A different option is to make your scheduled repayments more frequently. Instead of making your repayments at the end of the month, you could choose to pay them biweekly. So, for example, instead of paying £200 at the end of every month, you pay £100 every two weeks.

You might ask how this will make a difference since, at the end of the month, you will still have paid the same amount. Well, the thing is that with biweekly payments there will be two months in the year in which you’ll make three payments instead of two. Therefore, at the end of the year, you will have made 26 biweekly payments, which translate to 13 monthly payments instead of 12. That is one extra month of payment that you will be shaving off your loan term every year. While this might only have a modest impact on the time taken to pay back the loan, increasing the frequency of payments even further (if you can) could have a more significant impact.

Use windfalls to make lump sum payments

Once in a while, you might receive a bit of a windfall – perhaps a tax refund, an inheritance, a substantial work bonus or even a cash settlement. Instead of frittering it away, you could use the money to make a lump sum payment towards your student loan. A one-time lump sum payment could make a significant dent in your loan, helping you save on interests and reduce the total repayment term by months or even years.

Summary

Due to the unique nature of student loans, it may not always make sense to try to pay them off early. However, there are specific circumstances where it might actually be beneficial to do so. When considering this option, it’s a good idea to carefully consider your own situation and run the numbers to see if it makes sense for you to pay off your student debts early.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

MyWalletHero, Fool and The Motley Fool are all trading names of The Motley Fool Ltd. The Motley Fool Ltd is an appointed representative of Richdale Brokers & Financial Services Ltd who are authorised and regulated by the FCA, and we are permitted in this capacity to act as a credit-broker, not a lender, for consumer credit products (our FRN is 422737). The Motley Fool Ltd does not have permissions for, and does not advise on, investment products and services, but may provide information on investment products and services.

The Motley Fool receives compensation from some advertisers who provide products and services that may be covered by our editorial team. It’s one way we make money. But know that our editorial integrity and transparency matters most and our ratings aren’t influenced by compensation. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. The Motley Fool has recommended shares in Lloyds, Tesco and Barclays.

More on Personal Finance

Young black colleagues high-fiving each other at work
Investing Articles

If I’d invested £1k in Marks and Spencer shares at the start of 2023, here’s what I’d have now

Marks and Spencer shares have massively outperformed the UK stock market year-to-date. Can this form continue?

Read more »

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »