Rule of thumb · FinanceNº 166 / 167

A UK student loan is a tax, not a debt

In the UK you repay 9% of income above a threshold for a fixed number of years and the rest is cancelled. If you will not clear it before the write-off, overpaying buys you nothing.

Why it works

The balance and the interest rate look like a loan and behave like neither. Repayment is set by your salary, not by what you owe, so clearing the balance early does not reduce a monthly bill — it only ends one sooner. For the many graduates whose balance is written off with money still outstanding, every voluntary pound is a pound given away. The one thing worth working out is which side of that line you are on. All of this hangs on the write-off, so it does not travel: Australia and New Zealand have none at all, which makes overpaying genuinely worthwhile there, and the US standard plan is an ordinary amortising loan with no income link. The tool models all four.

When it fails

It depends entirely on the write-off. Australia and New Zealand have none, so the debt follows you until it is cleared and overpaying genuinely pays. The US standard plan is an ordinary amortising loan with no income link at all — the rule is a fact about one country's system.

Do it exactly

Estimate with the rule, then check it against the calculator that models it properly.

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Should I pay off my student loan early?

In the UK you repay 9% of income above a threshold for a fixed number of years and the rest is cancelled. If you will not clear it before the write-off, overpaying buys you nothing. The balance and the interest rate look like a loan and behave like neither.

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