The cost of going to university has ballooned, and it means the average graduate leaves university with around £50,000 worth of debt. That’s a large sum to pay off, and the way the student loan system has changed means that many people will have this debt for 40 years before it’s wiped out.

The debt doesn’t work like typical debt, as you only repay it once you earn more than a set threshold – meaning that if you lose your job you won’t have to repay the debt each month. It also won’t affect your credit report in the same way as credit card or overdraft debt, for example.

BIG DRAIN ON INCOME

But because you repay it at a rate of 9% of your earnings over the salary threshold, it can represent a big drain on your income. For example, someone who graduated university last year who earns £30,000 a year would repay £20 a month on their student loan. If those earnings rose to £50,000 they’d be paying off £170 a month in loan repayments – or more than £2,000 a year.

If you had some money stashed away, would it be better to overpay your student loan to pay off the loan when you graduate? In reality that’s a fiendishly tricky question to answer and depends on a lot of variables – many of which are unknown.

It all depends on your starting salary, how much of a pay rise you see over your career, whether you take any career breaks or whether you work part time at any point. It also depends what future governments do with the interest rate you pay on the debt and the threshold for repayments.

Frustratingly for graduates they can’t look into the future to see what their earnings will be and whether it’s worth repaying the debt early. However, there are some helpful rules of thumb.

REAL BENEFIT FOR HIGH EARNERS

If you know that you’re going to be a high earner, then paying off the loan when you graduate could save tens of thousands of pounds in interest charges. For Plan 2 loans, for those who started university between September 2012 and July 2023, a starting salary of around £40,000, that gradually increases over the next 30 years, is the tipping point where you’ll end up repaying the same amount that you borrowed.

That means for any salaries higher than this you’ll pay off more than you initially borrowed (see tables). But there is a huge gamble involved — a career break, a drop in pay, a move to part-time working or a period where your salary plateaus could tip the balance the other way.

For Plan 5 loans, for those who started university last year, the repayment terms are different. There’s a higher salary threshold when you start to repay the loan, but a lower interest rate and a longer repayment period, as the loan isn’t wiped out until after 40 years (rather than the 30 years for the previous system).

It means that the tipping point is a starting salary of around £30,000, where you’d repay the same amount as the original loan you took out. Again, you have to bear in mind any career breaks or reductions in income you might received during your working life.

OTHER USES FOR THE CASH

Another factor to consider is what else you could do with that money. The average student debt is around £50,000 so if you were in the (perhaps unlikely) position of having a pot worth £50,000 available to use you could invest it instead. If you instead invested that £50,000, getting a 5% return a year, you could grow that pot considerably over time. After 10 years it would have grown to almost £81,500 and after 15 years it would be worth almost £104,000. That is a significant pot of money to use, whether that’s buying a first property, for retirement or any other purpose.

Alternatively, if you wanted to save for a first property you could drip-feed the £50,000 into a Lifetime ISA account. You can pay in up to £4,000 a year, but the money gets a 25% boost from a government bonus. It would take you just over 12 years to put the whole £50,000 into a Lifetime ISA, but at the end of that period it would be worth just over £83,500, assuming returns of 5% a year. That’s a significant house deposit for anyone getting on the property ladder.

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