Wealth
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.
Below is a simplified overview of the main England and Wales student loan plans currently affecting borrowers:
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
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.
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.
Repaying a student loan must be weighed against other financial goals, such as:
For many younger borrowers, particularly those in higher-cost housing markets, early loan repayment may not be the most effective use of capital.
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.
For some families, clearing student debt may offer advantages:
Unlike gifting cash directly, this approach avoids creating a lump sum that could be spent or become part of relationship disputes.
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.
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.
Ultimately, the right decision depends on:
In many cases, student loans function more like an income-linked repayment system rather than a conventional debt.
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.
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