Martin Lewis warns that some people could be “flushing money down the toilet” by making a borrowing error

While answering questions from fans during a live Q&A on his app, money saving expert Martin Lewis came across a viewer who was lucky enough to have some spare cash they were debating what to do with. Their first port of call was to invest the money to overpay their student loan, but Martin warned that while that seemed like the best option, it would only work for certain people.

He warned that for most, overpaying the loan will only be beneficial if “you have a lot of money and can wipe it all out”. The financial guru advised that if not; “It’s better to put the money towards the mortgage, which is a much more difficult form of debt to pay off.”

Since there are five different student loan plans people could find themselves in, and the viewer didn’t specify which one they fit into, the MSE founder gave advice based on plan 2. This is the most common plan that covers people who have studied an undergraduate course, or Postgraduate Certificate or took out Advanced Learner Loans or Postgraduate Short Course Loans between September 2012 and July 2023.

This loan requires borrowers to repay 9% of their income above the annual threshold of £27,295 over 30 years. Once this time has passed, the loan is cancelled. Martin shared, “The question of whether you should repay or overpay depends on whether or not you’ll make it up in the 30 years before the loan is written off.

Pointing out that only 23 per cent of borrowers on this plan are expected to pay off their debt before it is written off, he added: “The only time it will make a difference is if you pay enough to then pay off the loan before it. wipes so you can save yourself future refunds.”

For many, a few thousand pounds still won’t stop or reduce payments enough before they are cancelled, so Martin warned that overpaying in this case would be “literally flushing the money down the toilet”. However, he identified two types of people who could benefit from overpaying loans: those with high incomes or those who borrowed only a small amount and can afford to pay it off before it’s written off.

For those who save in other student loan plans, especially plan 5, which is active for 40 years before being written off, the odds are more in favor of overpaying than waiting out the debt. Martin explained: “More people are likely to clarify this entirely, and if you are likely to delete it entirely, it is better to pay.”