Student loans: a graduate tax in disguise, and why overpaying usually loses
How Plan 2 and Plan 5 repayments really work (9% above a threshold, not a debt you chip away at) why most borrowers never clear the balance before write-off, and the honest test for whether an overpayment is worth making.
One lever among many. Optimising your plan shows every lever, which ones apply to you and how they interact.
Calling it a loan is the source of most bad decisions about it. Repayments depend on earnings, not on the balance or the interest rate; the balance is written off after a fixed term; and for most graduates the amount they repay is fixed by their salary path whatever the balance says. That is a graduate tax with a cap, and it should be treated as one.
How repayments work
You repay 9% of earnings above the plan's threshold (£29,385 for Plan 2, £25,000 for Plan 5 in 2026/27) collected through PAYE like tax. On a £38,000 salary that is £775 a year on Plan 2 and £1,170 on Plan 5. The balance grows with interest (RPI plus up to 3% on Plan 2, RPI on Plan 5), but the repayment does not: earn the same and you pay the same whether you owe £20,000 or £80,000. Plan 2 is written off 30 years after the April you first repaid; Plan 5 after 40. The student loan calculator gives your own figures by plan.
Why overpaying usually loses
An overpayment only helps if you would otherwise have cleared the balance before write-off; if you would not, the money simply vanishes into a debt that was going to be cancelled anyway. On a £45,000 Plan 2 balance and a £40,000 salary growing 3% a year, the calculator's simulation shows the loan is never cleared (£55,913 is written off), so a £10,000 lump overpayment saves £19,826 of future repayments over 35 years while the same £10,000 invested at 5% would grow to £55,160. Overpaying wins only for high earners on a steep salary path who would clear the balance early, and even then the return should be compared with a pension contribution, which usually beats it. The overpayment calculator runs the simulation to write-off rather than guessing.
What does change the answer
A large expected rise in earnings, a small remaining balance, or a partner's plan to clear it as a gift can all tip it. So can leaving the UK, where repayments are assessed differently. And salary sacrifice reduces the earnings the 9% is charged on, which the salary sacrifice calculator counts. In the Hundred Summers app a student loan is a repayment line that stops at write-off, so the plan shows the real cost over a career rather than a scary balance.
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