Students Loans: Should you pay it Off Sooner?

Student loans have become very popular in the UK. A common question now being asked by many about student loans is whether it is good to pay off the loan as soon as possible. The answer is quite simple. It is better not to pay off the student loans sooner than necessary. Because student loans are one of the cheapest forms of long term debt possible; by paying them off early you risk needing more expensive borrowing from elsewhere at a later date.

The above answer is applicable only to the Students Loans Company issued according to the official Government policies for loans taken out while at college or university. It is not applicable to any form of personal loan, career development loan, professional studies loan, or ordinary loan for students from a bank. Official student loans are very cheap debt. Actually, you are not paying any interest, because the interest rate is set at the rate of inflation. The rate changes each year in September, based entirely on the previous March’s inflation (RPI) figure.


Based on a pure financial analysis, a loan this cheap shouldn’t really be paid off more quickly than is necessary. But the right decision depends on whether you are a saver or a borrower.

Those with Saving Bank Accounts

The current top savings accounts have interest rates in excess of 6%; far higher than this year’s student loan rate of 3.8% Therefore if you have a £10,000 student loan and £10,000 in savings, you will earn more in the savings account than the loan costs.

Those who with debts or are likely to borrow

If you are borrower and have other debts, you should concentrate on paying off first the debts that have the highest interest rates. Almost all types of loans, except short-term 0% credit card offers, are costlier than student loans. Therefore you should reserve this low interest loans for pay off at a later period. Only repay the minimum you need to.


Please also note that even if you currently only have limited or no debts, you may need to borrow after leaving university; perhaps a mortgage for a house, to set up a new business, to buy a car, and so forth. Hence, if you pay off your student loan sooner than necessary, you may find yourself replacing it in a few years by costlier commercial loans which are more expensive than a student loan.