Plan 5 student loan: put the spare £200 in an ISA, not the loan

The identical test in both sides of this debate: an England Plan 5 borrower, £40,000 outstanding, £40,000 gross pay held constant, no other student loans. The 2026/27 £25,000 threshold and 9% repayment rule give £1,350 compulsory repayments a year. Compare £200 a month (£2,400 a year) paid at each year-end for ten years either into the loan or an ISA, then no discretionary contributions for the remaining 30 years. Both keep paying compulsory repayments until cleared. If the loan clears, redirect the freed compulsory payment into the ISA at each year-end. The Plan 5 rate is currently 4.1%; hold both rate and threshold fixed solely for the model. We compound annually, charge interest before each year-end payment, and look 40 years ahead at the write-off point. Real rates, earnings and rules will change; these are not forecasts. No tax on returns inside the ISA.

The plotted repayments are arithmetic from the published Plan 5 threshold, not predicted salaries. Use the ISA calculator for your own contribution schedule; it does not account for student loan deductions.

With no voluntary payments, this borrower pays £1,350 each year: £54,000 over 40 years. The modelled balance then stands at about £68,216, which is cancelled at the Plan 5 write-off. Put the same £2,400 a year into an ISA for the first decade and it is £24,000 at year 40 at 0% net return.

If that £2,400 goes to the loan for ten years instead, the balance clears in year 25. Loan payments total £57,099, including compulsory deductions; redirecting freed compulsory cash into an ISA leaves £20,901 at year 40 at 0% net return. Overpaying makes the borrower pay £3,099 more to SLC than the baseline. Interest avoided is not spendable profit if the balance would have been cancelled. This is why “loan rate versus ISA rate” gets the decision wrong.

At 2% hypothetical net annual ISA growth, the ISA-first account ends around £47,601, versus £24,222 after overpaying. At 5% net the corresponding balances are about £130,466 and £30,484. These are sensitivity tests, not historic or forecast returns: prices can fall, and fees and product choices change what you keep. At −2% net the order reverses: £11,974 for ISA-first against £18,127 after overpaying. That is the best argument for the opposing overpayment case.

Reproduce it: start each year with the previous loan balance; multiply by 1.041, subtract the smaller of that balance and £1,350 plus any £2,400 discretionary loan payment in years 1–10. Each annual ISA deposit is the remaining amount of that same £1,350 + (in years 1–10) £2,400 cash budget after loan payments; compound the existing ISA first at the scenario return. At year 40 cancel remaining loan under the assumed Plan 5 write-off. Returns below are hypothetical net annual returns after investment fees, not observed performance or an offered ISA rate. A negative return illustrates losses; a cash ISA with an actual quoted rate would need its own comparison.

You can normally withdraw from an ordinary ISA according to its provider terms; student-loan overpayments are not refundable. Money needed soon should not be exposed to stock-market risk simply because it sits inside a stocks and shares ISA: a cash ISA is an alternative, but its actual rate is not modelled here. The ISA rules currently allow £20,000 in subscriptions per tax year, and shelter cash interest as well as investment income and gains. A £200 monthly subscription fits if you have enough allowance left. See our ISA hub and pensions hub for other tax wrappers; pensions involve different access rules and are outside this comparison.

A borrower on a much higher, sustained salary may repay the whole loan without overpaying; interest then really is an extra cost they might avoid by paying sooner. Conversely, career breaks and low earnings can make write-off more likely. Check your own plan and real repayment history rather than applying a Plan 2 rule to a Plan 5 loan. The fixed threshold, fixed interest and flat salary in this test are deliberately simplifying assumptions, not claims about the next four decades. GOV.UK allows extra payments without penalty, so a borrower can wait until their payoff trajectory is clearer; there is no obligation to choose today.

This article is for informational purposes only and does not constitute financial advice. You should seek independent financial advice before making any investment decisions.