Put student debt in its place

Student loans have been a contentious issues for this Government, and millions of graduates will suffer more pain this autumn when the Government will double the interest rates on their loans from 2.4% to 4.8% in September.

The reason for the hike is because the interest rate is linked to the retail prices index (RPI) for the year to March. At March 2007 the RPI was 4.8%, whereas in March 2006 it was 2.4%. The rate is only changed once a year in September based on this single date in March. Interest accumulates as soon as students are paid, and continue to mount up until they have repaid.

The Student Loans Company, jointly owned by the Department of Education and Skills and the Scottish Office, administer student loans.

Student loans are repayable as from the April after they graduate, but are only due once they are earning at least £15,000 a year. Repayments are calculated as 9% of their earnings.

A typical graduate these days leaves university with an outstanding loan of £12,000, so at 2.4% £288 would be added. As of September, with the new interest rate of 4.8%, £576 would be added as interest. Currently about 2.5m graduates owe more than £15bn in student loans.

Compared with ten years ago, students are borrowing three times as much, and their total debt is estimated to be a record £18bn. Bigger loans than ever are needed with £3,000-a-year top-up tuition fees, and the estimated cost of doing a degree is now £33,500. In 1997 students borrowed £941m, but in the last financial year the figure had risen to over £3bn. The university charges of £3,000 in fees amounted to £400m of that figure.

Critics say that graduate debt is a millstone around their necks for many years.

The £3,000-a-year tuition fees are added to by £4,405 per year in living expenses, usually loaned too. In addition most students add to their loans from the Government by taking out overdraft facilities or loans on credit cards.

Reforms to tuition fees raised charges in autumn 2006 from £1,175 a year. Students do not have to pay anything back during their course, and it’s only when their earnings are £15,000 that loans are repayable.

The Ministry for Education maintains that student loans are a safe and effective way of financing education, and that students are borrowing within the amount to which they are entitled and not going beyond their means.

Students themselves may disagree as their first realisation of how much it costs to live hits home in their first few weeks of term, when they are supposed to concentrating on learning. They have to maintain a disciplined control of their budget and manage their money wisely to ensure they don’t become financially scarred for life.

For students, the same as for anyone else, loans and credit cards that they take out, and how they use them, will be kept on their credit file and how those debts are repaid are used for future credit scoring. A series of missed credit card repayments will make lenders think of the user as a bad credit risk. Cards with good rates will then be more difficult to secure in the future. Loans from the Student Loans Company are not included on anyone’s credit file. Making repayments in full and on time, and not taking on more debt that can be handled, will stand a student in good stead for future credit deals. These can include getting a job, renting a home and getting a mortgage, so it is important to stay in control of your finances.

Some key actions to take are firstly to research the market. If you do need credit then look for the best deals. Start with the Student Loan Company. Don’t be swayed by apparently good credit card deals – read the small print, understand it, and use comparison websites which will give you a good insight as to what constitutes a good credit deal.

Secondly, make a budget and try and stick to it – but be realistic too. What do you really need, and when will you need it?

It is also important to register to vote, as lenders use the electoral register to check you out. If they don’t find you, they are likely to turn you down. Register at your university address to save delays.

Remember that lenders – now and in the future – will use the information in your credit report and your application form information to create a credit score for you. Work at getting this as good as possible by keeping up with repayments at all times. You can obtain your own credit report from time to time to ensure that your credit rating is growing well.

Do not be lax with your ID. You may feel relaxed and safe in a university environment, but don’t leave your personal information around for unscrupulous persons to steal. It’s your life – keep it.

Always remember that credit worthiness is critical for your financial future.