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Should I invest or pay off my student loan?

In 2016, 473,000 people started to pay off their student loan, according to the Student Loans Company, and the average debt of those students was £24,640. When you start to earn more or come into some money it can be tempting to pay this off, but do the numbers really stack up?

Student loans are cheap debt

If you started university before 1 September 2012 you’ll be on the student loan plan one. From the 1 September 2016, and until further notice, the interest on this loan is 1.25%. Historically, interest rates have changed every year, but at their highest student loan interest rates were 3.8% in 2008.

Individuals on plan one will not start paying off their student loan until they earn over £17,495, and then they will pay 9% of their salary over £17,495.

In addition to this, those on plan one will have their debt wiped after 25 years, that means anything left on the balance of your loan will disappear after 25 years. If you consider that most people attend university straight after finishing school, and study for 3 years, graduating around 21, so the loan would be wiped at 46.

In this time individuals may have had a salary lower than £17,495 either at the beginning of their career or due to a break from work. Barely a week goes by without a company entering administration, making workers redundant; graduates might take a sabbatical, maternity or paternity leave, or even leave the workforce altogether. In any of those situations you’ll unlikely be paying off your student loan.

Should you invest or pay off your loan?

In most cases it probably doesn’t make sense to pay off your student loan early. This is not treated as debt in the same way as other debt; it will not be on your credit file. It will only impact your mortgage application to be considered as an outgoing, in the same way as pension payments.

A review into university funding in 2010 found that the majority of graduates won’t have paid back their full loan after the payment period. That means that an early payment could lead to you paying too much and effectively be money down the drain.

If you have some extra money it is worth checking the interest rate on your student loan and using that as your benchmark for your investment returns. If you achieve more than 1.25% you can still afford to pay off that debt if you choose to, but you’ll also be left with a little extra.

N.B. The above numbers only apply to those starting university before 1 September 2012 and therefore assume that plan one payments will apply.

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