Why am I being asked to pay my student loan by direct debit – and is it worth clearing the debt early?

I graduated from university 13 years ago and am finally getting close to repaying my student loan. 

I have about £4,500 left, plus interest, which based on my current monthly repayments would take me about eighteen months.

When I last logged into Student Finance, I got a message saying I should switch to direct debit repayments, instead of having the money deducted from my salary, ‘to avoid overpaying’.

The website gave me a ‘proposed’ direct debit amount which is about £50 per month less than what is deducted from my salary. It said I would pay this from June 2025 to December 2026, which fits with my 18 month timeline.

But I’m unclear on a few things. Firstly, why would I overpay if I kept having the money deducted from my salary? 

If I was paying too much, wouldn’t that mean I just paid off the balance sooner?

Also, I understand that having certain payments deducted directly from your salary reduces the tax you pay. Is that the case with student loans?

Alternatively, I have enough in savings to clear the whole balance and still have an emergency fund left over.

I’d avoided doing so in the past as I was saving for a house deposit. But as I have recently bought a flat, is it now worth considering, or would the money be better off invested, paid off the mortgage or put toward my pension?

Why switch your student loan to direct debit?

Angharad Carrick of This Is Money says: Congratulations on coming to the end of your student loan repayments and recently buying a home.

I know all too well how much the repayments can hang over you, especially if you’re not able even to pay off the interest that’s applied each month.

The amount you repay and the interest applied to that will depend on when you graduated and the amount you now earn.

The thresholds and accrued interest depend on which plan you’re on, which you can see below.

 Given you graduated 13 years ago, it means you were part of ‘Plan 1’ – the cohort that paid £3,000 per year. 

You’ll repay 9 per cent of your income over the threshold, which is currently set at £24,990, and at the moment the interest is charged at 4.3 per cent.

The interest rate changes annually, usually on 1 September, based on the Retail Price Index from the previous March. 

Usually, student loan repayments are taken directly from your salary, but in your case, you’re now being asked to switch to direct debit payments. 

The Student Loans Company, the Government body which manages student finance, started giving people in their final two years of repayment the option to change to direct debit to avoid overpaying a few years ago.

You asked why continuing to have the money taken from your salary meant you would overpay, so I asked the Student Loans Company to clarify. 

It said that when a customer’s final remaining balance is lower than the amount normally deducted from their pay, the system does not immediately pick this up so they will end up overpaying. 

Once that balance has cleared, His Majesty’s Revenue and Customs will instruct your employer to stop deducting the repayments. 

However, depending on when payroll is calculated, another deduction could be taken in the time it takes to sort this out. 

SLC says these issues can be avoided by switching to a direct debit, and if you keep your bank and contact details on your online account it will automatically refund any credit balance up to £5,000.

Ian Futcher, chartered financial planning consultant at Quilter, says: Switching to direct debit seems the sensible option as it will make sure there are no overpayments which would then have to be claimed back at a later date.

Is there a tax benefit?

Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, says: As student loan payments are typically collected through the PAYE system, it means they are deducted from your pay along with your income tax and National Insurance with your pay slips stating how much has been taken.

One way to look at it is to consider your student loan repayments as a type of tax. 

As your repayments are calculated on your gross salary, or taxable income, in the same way that income tax or National Insurance Contributions are, it means there is no tax benefit to making your repayments via PAYE versus a direct debit.

Once you stop making the repayments you will simply receive a boost to your take home pay. With that in mind, it may make more sense to switch to direct debits rather than run the risk of overpaying.

Is it worth paying off the rest of the loan early?

Angharad Carrick says: Usually, the experts say that it is not worth paying off a student loan if you’re only a few years into your job. 

But given you graduated 13 years ago and you only have £4,500 to pay off, it might be worth considering, especially because it will mean a boost to your take-home pay and will save you paying the interest.

This money could be put towards your mortgage or pension.

Ian Futcher adds: Normally, in financial planning, we strongly encourage paying off debts quickly to avoid high interest rates, especially with credit cards or payday loans. 

However, student loans are not like normal debts, and in most cases, making overpayments will not affect the loan repayment time frame.

But when the loan is nearly cleared, paying it off early should be considered. 

Since you have sufficient emergency funds, which is always a top priority, it would be worth calling the student loan company to see if clearing the loan early would reduce the total amount you need to repay.

At a rough estimate, 4.3 per cent of the £4,500 owed is about £194. In comparison, fixed-rate cash Isas for one year are offering around 4.4 per cent.

Investing the money longer term may have better outcomes as there is only 18 months left on the student loan, but this depends on your overall long-term planning.

Alice Haine says: Another consideration is whether you will need to access other forms of credit in the next couple of years, which could be more expensive than your student loan. 

You don’t want to use up spare funds clearing the loan and then need to borrow more money on a credit card or personal loan. 

Remember, once you decide to clear it, you can’t go back on that decision so weigh it up carefully.