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Student loans: How repayment works and whether you should pay off early

How do student loans work in England and Wales?

Student loans, particularly how they are repaid, have recently come back into focus. While changes to the student loan system are not new, the freezing of repayment thresholds is the latest development affecting graduates now in the workforce. 

Over time, multiple reforms have created several different repayment “plans”, each with different thresholds, interest rates, and repayment periods. Understanding which plan applies to you or your child is key to knowing how much needs to be repaid and whether it may ever be fully cleared.

Oxford university

Student loan repayment plans explained

Below is a simplified overview of the main England and Wales student loan plans currently affecting borrowers:

 

Plan 1

- For students who started before 2012

- Repayment rate: 9% of income above the threshold

- Interest: Lower of RPI or Bank of England base rate + 1%

- Repayment threshold: £26,065

- Loan write-off: after 25 years

Plan 2

- For students who started between 2012 and 2023

- Repayment rate: 9% of income above the threshold

- Interest: RPI plus up to 3% depending on income

- Repayment threshold: £28,470

- Loan write-off: after 30 years

Plan 5

- For students starting from 2023 onwards

- Repayment rate: 9% of income above the threshold

- Interest: RPI only

- Repayment threshold: £25,000

- Loan write-off: after 40 year


 

 

As the system has evolved, repayment periods have become longer and, for many borrowers, interest rates higher. This has led to increasing debate about whether student loans now function more like a graduate tax than a traditional loan.

£99,987 and counting: graduates trapped by ballooning student loans | Student finance | The Guardian

Why many graduates may never repay their student loan

In practical terms, many graduates are now expected to repay more each year, yet still may never fully clear their balance before it is written off. 

This is particularly relevant where interest accrues faster than repayments, especially for mid-income earners. As a result, the key question many families ask is:

“Should I, or should my parents, pay off a student loan early?”

There is no universal answer. The decision depends on individual circumstances and several key financial planning factors.

Key factors to consider before repaying a student loan early

1. Expected lifetime earnings

Your likely career earnings trajectory plays a major role.

With repayment thresholds currently frozen (Plan 2 until 2030 and Plan 5 until 2027), any future salary increases driven by inflation will result in higher real repayments over time. This is an example “fiscal drag”, similar to how income tax thresholds have been frozen since 2022.

However, borrowers with lower lifetime earnings may never repay the full balance, making early repayment less beneficial.

2. Competing financial priorities

Repaying a student loan must be weighed against other financial goals, such as:

- Building an emergency fund

- Saving for a house deposit

- Maximising pension contributions (with tax relief benefits)

- Using annual ISA allowances

For many younger borrowers, particularly those in higher-cost housing markets, early loan repayment may not be the most effective use of capital.

Student Loans and Inheritance Tax Planning

Student loan repayment can also form part of wider generational wealth planning discussions between parents and advisers.

With more assets potentially being drawn into the scope of inheritance tax (as we have recently seen with pensions), early gifting strategies are becoming increasingly important.

Paying off a child’s student loan can sometimes provide a structured way to pass on wealth while delivering immediate financial benefits to both parents and children.

Couple walking retirement planning

Potential benefits of paying off a child’s student loan

For some families, clearing student debt may offer advantages:

- Improves the child’s monthly cashflow.

- Can strengthen affordability assessments for mortgage applications.

- Ensures gifted funds are used for a defined purpose.

- Removes debt that might otherwise grow over time and subject to potential changes.

Unlike gifting cash directly, this approach avoids creating a lump sum that could be spent or become part of relationship disputes.

The financial impact of interest and repayments

Recent data suggests that the average graduate debt in England is around £53,000.

UK student loan debt 2025| Statista

Because interest accrues annually, some borrowers repay less each year than the interest added to their balance. This means the total debt can continue to rise despite ongoing repayments.

Working example

A young professional in London earning £52,000 on a Plan 2 student loan would only repay around £2,118 that year. However, if their loan balance was £53,000, the interest added over the same period could be £3,286. This means their debt would actually continue to grow, because their repayments would not even cover the interest being charged.

Should you pay off a student loan early?

Ultimately, the right decision depends on:

- Income level and career outlook

- Financial priorities and liquidity needs

- Tax planning considerations

- Whether the loan is likely to be repaid in full

In many cases, student loans function more like an income-linked repayment system rather than a conventional debt.

Speak to a financial adviser about student loan planning

Many people consider the concept of paying off the debt but rarely talk about it.

Student loan decisions often sit within broader financial planning, including tax efficiency, inheritance planning, and long-term wealth strategies. If you would like to explore how your or you child’s student loan fits into your wider financial plan, or simply to discuss your personal circumstances, please contact one of our advisers.

You can reach us at info@thepennygroup.co.uk or on 0207 061 2345.

Penny Group Office89

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The Penny Group Ltd is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.

Approved by The Openwork Partnership on 24/02/2026

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