Should I pay my student loan off or invest?

If you’re reading this with sizable student loan debts to your name, you may be wondering whether paying off your student loans early is the smart move or not. Prioritising reducing debt is usually very prudent and responsible. But what many graduates find is that after looking deeper at how student loan repayment really works, investing that money could do more for their long-term finances.

How student loan repayment works

Deciding to go to university as a domestic student in the UK usually means borrowing somewhere in the region of £30,000 to £50,000 through student finance. With interest added in the years after graduating, that balance can grow substantially. In some cases, to double or triple the original cost of the degree. Scary stuff, but it’s important to understand that, unlike most debt, the amount you pay back each month isn’t based on this total figure of how much you owe. 

Instead, the amount you pay back is linked to your income. You repay a fixed percentage of earnings above a certain threshold. As the amount you pay back is tied to your income, it follows that if your income falls, your repayments fall. If your income rises, your repayments rise. If you stop working altogether, the repayments stop. Hence, a more useful way to think about student loan payments is as if they are an extra tax – a “graduate tax” if you like.  

Most graduates are on Plan 1 or 2 with an undergraduate degree, so pay back their loans above the threshold of around £27,000 to £30,000. Full details are shown in the table below. In the 2025 Autumn budget, the government announced that postgraduate, Plan 2 and Plan 5 thresholds  would be frozen for several years. They would have ordinarily gone up steadily over this time with wage inflation, but as that’s not going to happen, more graduates will find themselves getting caught in the “tax”. This is called fiscal drag and it’s a well-known problem.  

In the article below, we explain how fiscal drag works and how it affects the taxes you pay.

Read more:  What is fiscal drag and how does it affect the taxes you pay?

Normally, the effective “graduate tax rate” is 9% on earnings above the threshold for Plan 1, 2, or 4 loans, plus 6% if you need to pay back any postgraduate loans.  

This already sets student loans apart from credit card loans or payday loans. Usually, clearing large amounts of debt like this would be wise . But as student loan repayments are tied to your income, no matter what the size of the balance overall, paying extra is more of a choice. And as such, this choice should be weighed against other uses for your money, including investing. 

Interest on student loans in the UK

The biggest reason many grads struggle to clear their balance is the interest rate charged on the loan. The exact loan interest depends on the repayment plan you’re on.

Currently, interest charged is 3.2% on Plans 1, 4 and 5, and 6.2% on any postgraduate loans. But millions of graduates in the country who started their undergraduate courses between September 2012 and August 2023 actually pay a variable rate which is linked to inflation – the retail price index (RPI) plus 3%. This is why a troubled economy can make it especially hard for graduates to keep up. 

This much is apparent when we crunch the real numbers. The average debt students graduate with is £53,000, so 6% interest would be £3,180. The average graduate starting salary is £36,335, so if they repay at a rate of 9% above a threshold of £29,385 (Plan 2 loan), the average graduate will only repay £625.50 per year. That means the balance still rises by over £2,500. And when compounding starts to take effect, the loan balance can easily get away from you further. Interest is added regardless of what you have managed to pay off in the year. Or what you’re earning. It’s added even if you’re unemployed. And it will get larger and larger on increasing loan amounts. 

The government recently introduced a temporary cap of 6% interest on Plan 2 and Plan 3 loans due to the economic impact of the conflict in Iran . This may sound like welcome relief, but it makes no difference to monthly repayments. Those depend on your income above a threshold, not the interest rate charged. 

The comparison below puts this sharply into focus. If they earn the same, graduates with £50,000 and £500,000 of debt lose the exact same amount from their pay packet each month. That is again why student loan debt is not like other forms of debt, and why again it makes more sense to view this debt as a long-running tax than as a balance you should be worried about repaying in full.

When does your student loan get wiped?

So, this becomes the all-important question. Eventually, your balance will be written off. This is after a set period – typically 25 to 40 years after you started to pay back the loan, depending on your plan and when you went to university. The table below offers some guidance:

Unsurprisingly, most loans end up being forgiven. The government expects 25-33% of the money it lends in student loans to be written off. That was over £100mn in the 2023/2024 tax year. 

This is why many young people have to ask themselves if it’s really worth trying to pay off the loans faster than they grow with extra repayments. They’ll be written off anyway. So, would extra repayments genuinely improve their long-term wealth, or they be better off investing instead?

Should you pay off student loans early?

All things considered, for most graduates, the answer is probably not. The full balance will be wiped out anyway after a few decades, regardless of how it’s grown, and indeed, how much you made an extra effort to pay back. Remember, your monthly repayments are based on your salary, not on the amount of debt you owe.

Even with what might feel like a mountain of student debt towering over you, it won’t hurt your credit score or get passed to children or family as part of the inheritance if you were to pass away. However, mortgage lenders might still take your student loan repayments into account as part of their affordability assessment, which affects how much you can borrow.

Obviously, if you did manage to pay off the full balance, the monthly payments will stop entirely. That may be advantageous, leaving you with more take-home pay. But if years of interest have already been applied to push the loan balance much higher, the upfront cost of paying it off in full can be so large that the extra take-home pay you gain later may never make up for it.

Should you pay student loans or invest?

Many graduates will never repay their full student loans before they’re written off, so in that context, making voluntary overpayments means giving up money that could be going towards your long-term future instead.

In the same way that student loan balances snowball with the effect of compound interest, so too can you harness this effect to your own advantage by putting money into investments. Like interest, returns can be earned not just on your original investment, but on previous gains as well. The longer money remains invested, the more this effect strengthens. Your investment pot could eventually compound faster than your student loan balance, even if there are ups and downs along the way.

New to investing? A little bit of help and guidance can set you on your way. Check out this series of video tutorials. Each lesson covers a new investment topic, helping you to understand the basics, bust the jargon, and break down the barriers to investing.

Also, money put towards your student loans is committed once paid and cannot be accessed again. But if you invest your money and find you need it later, simply to have more breathing room or to fund another opportunity, you can sell your investments. This is called liquidity. Of course, investing carries risk, so your investments shouldn’t count as your emergency fund. But at least the money is theoretically able to be accessed again should you need it. 

There’s also the question of tax efficiency. There’s no way to get preferential tax treatment by paying off a student loan early because the money you use to do this has already been fully taxed. By contrast, pension saving through schemes like salary sacrifice mean you pay less income tax and National Insurance as you contribute that money to your cause. And because student loan repayments are a fixed percentage of your income, reducing this income through salary sacrifice into your pension also lowers the graduate tax you will be paying. This nifty trick goes to show why overpaying a student loan should be weighed against more tax-efficient alternatives first.

So, is paying off your student loans worth it?

If you have the means, paying for your studies upfront is a good idea to avoid the “graduate tax”. 

If you’re a consistently high earner, or perhaps left university early with a smaller debt, and you’re confident you will repay the loan well before it is written off, then reducing interest through early repayment is quite rational. We’ve put together a guide below to help you pay for university the smart way, through financial planning.

Read more: How do you pay for university fees through financial planning?

For some, being debt-free can feel reassuring. And that preference is entirely valid. But because repayments on student loans aren’t like other debts, the opportunity cost of repaying instead of doing something else with your money deserves careful attention. Perhaps a better option for you might be to build an emergency fund, reducing other, more punishing forms of traditional debt that you have, or save in a high-interest account for something like a house deposit? 

No two financial journeys are the same. To help work out your next move, book your free, 15-minute consultation with one of our professional financial coaches.