STUDENT loan interest rates have jumped to a huge 5.3% for hundreds of thousands of people across the UK. Don’t think of this as a student issue, it’s actually about outstanding loans for the four million-plus graduates in their twenties, thirties and forties who haven’t cleared their debts.

And with rates soaring, many are asking ‘if I’ve got spare cash, should I use it to pay off or reduce my student loan?’

Your interest depends on the loan type There are two very different types of official student loan.

Every September the Student Loans Company sets new annual rates for both.

● Student BEFORE 1998.

Your loan interest’s now 5.3% (was 4.4%). The rate is set annually, based solely on the prior March’s inflation rate (RPI). Sadly, that was a big 5.3%, so 320,000 graduates now pay £530 interest a year per £10,000 owed.

● Student FROM 1998 onwards.

The interest remains at its current 1.5% rate, but that could change.

The rate’s set at the prior March’s RPI (5.3%).

But a clause says in the unlikely event that the Bank of England base rate + 1% point is lower than RPI in any month, you only pay that. Well, we live in unusual times, so as the base rate’s just 0.5%, this unlikely event’s happened for a few years.

This means if you’re one of the 3.9m with these loans, you currently pay 1.5%. But if base rates rise, the student loan rate will immediately follow – now up to 5.3% (was 4.4%).

Three student loan need-to-knows

Student loans are very different from any other kind of debt, so before making any decision it’s important to understand the following.

1. They have no ‘real cost’ of borrowing

Student loan interest is never more than the rate of inflation (the rate prices rise) so there’s no real cost, as borrow enough to buy a shopping trolley’s worth of goods and you only repay whatever the same shopping trolley costs. Thus borrowing hasn’t diminished your spending power. This will change for new 2012 students; see www.moneysavingexpert.com/students2012.

2. If you don’t earn enough, you don’t need to repay

Unlike commercial borrowing, you only have to repay if you’re earning over a set amount.

This applies even if you have started paying and then your income drops.

For post-1998 loans you pay 9% of everything earned over £15,000 – for pre-1998 you only pay if you’re earning over £27,700 (then you repay a hefty whack).

Therefore if times get tough, you lose your job or your income drops, then, unlike other lenders, the Student Loan Company won’t come knocking.

3. Loans get wiped after 25- 35years (ish)

The debt doesn’t last forever.

Depending on when and where you studied, the debt is wiped even if you haven’t paid it back.

For some it’s at age 50, 60 or 65, others 25-35 years after studying. Look yours up at www.moneysavingexpert.com/studentloanrepay.

The debt also clears if you die; sounds morbid, but the key is it isn’t passed on to your dependents.

This means if you did overpay, but then stopped earning over the threshold or died, you’d have repaid unnecessarily.

Should I pay off my student loan?

Always ‘repay debts with savings’ is my standard mantra, but it’s not that easy with student loans as they’re the cheapest long-term borrowing possible.

● If you’ve other debts. Always first use any cash to pay off higher interest rate debts first as the higher the interest, the quicker they grow.

Even if you have a mortgage, loans or credit cards cheaper than your student loan this year, student loans are guaranteed not to be higher than inflation in the long run and don’t need repaying if your income drops. So you’re usually still better off clearing other debts first.

● If you’re debt free. Even if you’re debt free, if you’ve a post- 1998 loan, for most the answer is ... no, no and no. Many bright graduates say: “It’s not costing me much, so I’m going to pay it off.” This logic’s topsy-turvey.

For post-98 loan-holders, the interest savings pay see www.moneysavingexpert.com/savings is MORE than student loans cost. So you’re better off saving than repaying the debt.

Recent graduate Ivor Gudjob has £10,000 of student loan debt, now at 1.5%.

He’s debt free and has £5,000 saved up. His choice is pay off the loan, or save it in a top cash ISA at 3% tax-free. Easy calculations show that repaying the loan saves him £75 a year, but saving earns him £150 a year, so he’s £75 better off.

It’s different for graduates with pre-1998 loans at 5.3%. Then at current savings rates, you can’t outdo the student loan interest rate (though it may be possible again in future years).

Even then, do remember that pay it off early now, and if you later need more expensive borrowing from elsewhere (eg mortgage or car loan), you’re effectively repaying student loans only to borrow elsewhere at higher, commercial rates.

If that’s likely, dunk it in the top savings account to minimise the interest impact.

The only exception is for those with no self-control. If you’ll just spend or waste the cash, then overpaying the loan is playing safe.