Student loan interest falls to 6.6% for Plan 2 graduates: should you ever overpay?

The interest rate on Plan 2 student loans, held by about 5 million people in England who started university between 2012 and 2022, fell to a maximum of 6.6% in September, down from 7.3%, after the retail prices index figure used to set it came in lower than last year. It is still the most expensive student debt in the country, and the question graduates ask most often is whether they should pay it off faster.

For most of them, the answer is no. Plan 2 repayments are 9% of everything earned above £28,470 a year, regardless of the balance, and any debt remaining after 30 years is written off. Government modelling suggests that only about a quarter of Plan 2 borrowers will ever repay in full. For the rest, the balance is a number on a statement that has no effect on what they pay each month, and every pound of voluntary overpayment is a pound that would have been written off anyway.

“Think of it as a graduate tax with a 30-year expiry date rather than a loan,” said Owen Blackwood, a financial planner at Ridley & Vance in Bristol. “The people who should consider overpaying are those who are going to clear it anyway, which means high earners from early in their career, typically people who were on £45,000 by 28 and are now well above that. For everyone else, overpaying is a gift to the Treasury.”

The interest rate matters most to that higher-earning group. Plan 2 interest is tiered by income, from RPI alone for those earning under the threshold to RPI plus 3% for those on more than £51,245, which is where the 6.6% figure comes from. A graduate on £60,000 with a balance of £45,000 is accruing about £3,000 a year in interest while repaying about £2,840, so the balance is still growing. If they expect their salary to keep rising, they will clear the loan eventually and paying extra now will save interest.

Even then, there are better uses for spare money first. Anyone not paying enough into a workplace pension to collect the full employer match is turning down free money that outstrips any saving on loan interest. High-interest credit card or overdraft debt should go before a student loan every time. And an emergency fund of three months’ expenses in an easy-access savings account comes before all of it, because student loan overpayments cannot be reversed.

Graduates on other plans face a different calculation. Plan 1 loans, for those who started before 2012, charge 4.3% and are written off after 25 years. Plan 5 loans, for those who started from 2023, charge RPI only, currently 3.6%, but have a lower repayment threshold of £25,000 and a 40-year term, which means far more borrowers will repay in full and overpaying may make sense for a wider group. Postgraduate loans charge 6.6% and are repaid at 6% above £21,000 over 30 years.

Whatever your plan, check that your employer is deducting the right amount. The Student Loans Company said last year that about 400,000 people had overpaid through payroll, usually because deductions continued after the loan was cleared or because the wrong plan type was applied. Refunds can be claimed through the SLC’s online account and are typically paid within a month.

Mr Blackwood’s final piece of advice is to stop looking at the balance. “I have clients in tears over a £60,000 figure that will never cost them a penny more than 9% of what they earn above the threshold,” he said. “It is designed to be paid as you go. Let it.”