Student loans are how most people fund university in the US, UK, and Canada. But the three systems work very differently — from how much you borrow to when (and whether) you ever fully repay. This guide breaks down each country’s system, compares interest rates and repayment terms, and helps you decide whether to repay early or invest instead.
United States: Federal Student Loans
The US system is the most complex. Federal student loans come from the Department of Education, and most undergraduates borrow through Direct Loans.
Types of Federal Loans
| Loan Type | Who Borrows | Annual Limit | Interest Rate (2025-26) |
|---|---|---|---|
| Direct Subsidized | Undergrads with financial need | $3,500–$5,500 | 6.53% |
| Direct Unsubsidized | Undergrads and grads | $5,500–$20,500 | 6.53% (undergrad), 8.08% (grad) |
| Direct PLUS | Parents of undergrads, grad students | Cost of attendance minus other aid | 9.08% |
Subsidized loans are better because the government pays interest while you’re in school at least half-time. Unsubsidized loans accrue interest from day one.
Repayment Plans
The US offers multiple repayment plans:
- Standard Repayment: Fixed payments over 10 years. Highest monthly payment, lowest total interest.
- Graduated Repayment: Payments start low and increase every 2 years over 10 years.
- Extended Repayment: Fixed or graduated payments over up to 25 years.
- Income-Driven Repayment (IDR): Payments based on income and family size. Four plans exist — SAVE, PAYE, IBR, and ICR. After 20–25 years of payments, remaining balances are forgiven.
Public Service Loan Forgiveness (PSLF)
If you work for a government agency or qualifying nonprofit and make 120 qualifying monthly payments (10 years) under an IDR plan, your remaining balance is forgiven tax-free. This is one of the most valuable forgiveness programs available.
Key US Features
- Interest may be tax-deductible (up to $2,500 per year)
- Deferment and forbearance options during hardship
- No early repayment penalties
- Federal loans do not die with the borrower (estate may be responsible)
United Kingdom: Plan 2 and Plan 5 Loans
The UK system is fundamentally different from the US. Student loans in the UK work more like a graduate tax than a traditional loan.
Repayment Plans
| Feature | Plan 2 (post-2012) | Plan 5 (post-2023) |
|---|---|---|
| Repayment threshold | £27,295 per year | £25,000 per year |
| Repayment rate | 9% of income above threshold | 9% of income above threshold |
| Interest rate | RPI + up to 3% (income-dependent) | RPI |
| Written off after | 30 years from first repayment | 40 years from first repayment |
How UK Repayment Works
Repayments are automatic through the employer via PAYE. You pay 9% of everything you earn above the threshold. There is no choice about monthly repayment amounts — it is entirely determined by your salary.
Example: Earning £35,000 on Plan 5:
- Amount above threshold: £35,000 − £25,000 = £10,000
- Annual repayment: £10,000 × 9% = £900
- Monthly deduction: £75
Key UK Features
- No impact on credit score — student loans do not appear as debt
- No pressure to repay quickly — if you earn below the threshold, you pay nothing
- Written off entirely after 30 or 40 years
- No early repayment penalties (but almost no one benefits from early repayment)
- Loans are discharged on death
Canada: Government Student Loans
Canada combines federal and provincial loans, similar to how the US combines federal and (in some cases) state loans, but the Canadian system is simpler.
Types of Loans
- Canada Student Loans: Federal loans for full-time students. Interest rate is prime + 0% (floating) or prime + 2% (fixed). Repayment Assistance Plan available.
- Provincial Loans: Each province offers its own additional loans with varying terms. Some provinces (like Ontario and Alberta) offer interest-free provincial loans.
- Canada Student Grants: Non-repayable grants for students from low- and middle-income families. Up to $6,000 per year for full-time students.
Repayment
| Feature | Details |
|---|---|
| Interest rate | Prime (currently 4.95%) or Prime + 2% fixed |
| Grace period | 6 months after leaving school |
| Repayment Assistance Plan (RAP) | Payments capped based on income |
| RAP Stage 1 | Monthly payment adjusted to income, government covers interest not covered |
| RAP Stage 2 (after 60 months) | Government begins repaying principal on your behalf |
| Loan forgiveness | Remaining balance forgiven after 15 years of RAP |
Key Canadian Features
- Interest on federal student loans is now tax-free (as of 2025)
- No interest on provincial portions in several provinces (BC, Manitoba, Nova Scotia, PEI, Quebec)
- Provincial loans in Quebec, Manitoba, and Saskatchewan are interest-free
- RAP is generous — after 15 years, any remaining balance is forgiven
Side-by-Side Comparison
| Feature | US (Federal) | UK (Plan 2/5) | Canada |
|---|---|---|---|
| Interest rates | 6.53–9.08% | RPI to RPI+3% | Prime to Prime+2% |
| Repayment trigger | Income + loan balance | Income only | Income + loan balance |
| Forgiven after | 20–25 years (IDR) or 10 years (PSLF) | 30–40 years | 15 years (RAP) |
| Impact on credit | Yes | No | Yes |
| Death discharge | No (estate responsible) | Yes | Yes |
| Early repayment penalty | No | No | No |
£40,000 UK Loan vs $40,000 US Loan: A Real Comparison
Let’s compare two graduates — one in the UK with a £40,000 Plan 5 loan, one in the US with a $40,000 Direct Unsubsidized loan — both earning £35,000 / $45,000 respectively.
UK Graduate: £40,000 Plan 5 Loan
- Salary: £35,000
- Threshold: £25,000
- Repayment: 9% × (£35,000 − £25,000) = £900/year (£75/month)
- Interest rate: RPI (assume 4% average)
- After 30 years: Remaining balance written off
- Total repaid over 30 years: approximately £27,000
- Amount written off: approximately £40,000+ (including interest accrued)
The UK graduate repays about £27,000 on a £40,000 loan and the rest is wiped.
US Graduate: $40,000 Direct Unsubsidized Loan
- Salary: $45,000
- Standard Repayment (10 years): Monthly payment ≈ $460/month
- Total repaid over 10 years: approximately $55,200
- Total interest paid: approximately $15,200
If the US graduate switches to an IDR plan (SAVE):
- Monthly payment: approximately $230/month (based on income)
- After 20 years: Remaining balance forgiven
- Total repaid over 20 years: approximately $55,200
- Amount forgiven: depends on interest accrual
Key Takeaway
The UK system is far more borrower-friendly. A £40,000 UK loan costs around £27,000 in total repayments regardless of how long you take. A $40,000 US loan costs $55,000+ under standard repayment. The US system penalises high earners and rewards those who qualify for PSLF or IDR forgiveness.
When to Repay Early vs Invest
You Should Repay Early If
- You have private student loans with high interest rates (7%+)
- Your loan interest rate exceeds what you can reliably earn investing (7–8% long-term stock market average)
- You want the psychological freedom of being debt-free
- You are in the US and your loan does not qualify for forgiveness programs
You Should NOT Repay Early If
- You are in the UK — almost everyone is better off making minimum repayments and investing the difference, because the loan is written off after 30/40 years
- You are in Canada and qualify for RAP — minimum payments may be very low
- You are in the US and pursuing PSLF or IDR forgiveness — extra payments wasted if your balance will be forgiven
- You can earn more investing than your loan interest rate (only applies to low-rate loans)
The General Rule
Compare your loan interest rate to your expected investment return. If your loan charges 6.53% and you can earn 8% in a diversified index fund, the math favours investing. But if your loan charges 9%+, repay early.
For UK borrowers specifically, the maths almost always favours minimum repayments plus investing, because most graduates never repay the full amount.
Summary
Student loans vary enormously between countries. The US system offers the most repayment flexibility but the highest costs. The UK system is the most borrower-friendly — effectively a graduate tax with built-in forgiveness. Canada sits in between with generous Repayment Assistance. Whatever country you are in, understand your repayment plan, check if forgiveness applies, and make informed decisions about early repayment versus investing.