How to cope with a degree of debt
Tens of thousands of students who, like me, graduated this month are likely to see the cost of their debts double next year.
The reason is that the rate of interest charged by the Student Loans Company is set by the annual rate of increase in the Retail Price Index (RPI) once a year in September. Last September, RPI was rising at 2.4 per cent but it increased to 4.4 per cent this week. Worse still, many economists believe it has further to go.
Yet few students are aware of the effect the hike in interest rates will have on what they have borrowed. The majority of graduates will leave university with more than just a degree and some good memories.
Student bank accounts offering interest-free overdrafts, credit card applications arriving through the letter box and tempting advances from the Student Loans Company that arrive conveniently at the beginning of every term, mean the average student will leave university next year with around £13,000 worth of debt.
Of course, this is not the case for all scholars. Some muddle their way through without the help of government. Some are competent savers, hard workers or financially aided in other ways.
Before starting at Leeds University three years ago, I had every intention of taking advantage of the interest-free loan and investing it in an individual savings account (Isa). At the beginning of each term, I dutifully transferred the £1,000 from the Student Loans Company into my HSBC High Interest account, and, as the term progressed, transferred it, bit by bit, back into my current account. Unfortunately, saving is one of those situations where the thought doesn't really count.
The average full-time student spends more than £10,270 each academic year, with a student loan funding a third of this expenditure. Parents, family and friends contributed about a quarter of the money, with the majority of students making up the rest with savings from summer vacation work.
My own employment history has ranged over a variety of jobs. Easily the worst was what I choose to define as 'advertising' but which actually consisted of holding a 'Sale this way' sign for eight hours in the rain. Then there was the two-year part-time position I held at Carphone Warehouse during university.
More than half of all students take paid employment during the academic year. However, 39 per cent of those who did felt working had affected their higher education experience and impacted upon their academic results.
Getting a student loan then, seems unavoidable for most, especially for those in the later stages of their degree, when more time is spent in the library. More than 80 per cent of students do take a student loan, with the number of borrowers at the end of this year totalling 2.5m, with a combined debt of £15.3bn.
The student loan is arguably the most manageable type of debt - it certainly costs a lot less than other forms of credit. For example, Barclaycard, Britain's biggest credit has an average annual percentage rate (APR) of 14.9 per cent . But communication between the Student Loans Company and their borrowers is less than frequent.
Since the introduction in 2004 of Student Direct Finance, a partner of the Student Loans Company, systems failures have resulted in late loan payments, and statements were sent out that showed total repayments of less than half what some graduates had repaid. Many students imagine their loans are interest-free and do not realise charges are linked to the RPI.
The good news is that this year's graduates will not have to start paying back Student Loans Company debts until April 6, 2008. Even then, only those earning above £15,000 will have to start repayments. The collections are administered via the Income Contingent Repayment Scheme. This means that the amount you have to repay is based on how much you earn. Once you earn above the £15,000 threshold, 9 per cent of earnings in excess of that will be taken out of your salary every month. Interest is then calculated at the end of each financial year and applied to your account.
As most graduates' first earnings will fall under the threshold and many students are unaware of the APR being levied on their accounts, they could be prolonging and increasing their debt.
One student told me: "If I had known, I would have set up small direct debits of maybe £20 a month, then at least I wouldn't have been charged interest on what I had managed to repay."
Of course, it is possible to set up repayments such as these and, if you're feeling particularly flush or a parent particularly generous, it is possible to pay off lump sums too.
Top tips
# Start repaying your loan as soon as you can. £20 a month may not seem much but it does make a difference
# If you are self-employed and earning over the threshold of £15,000 it is your responsibility to make repayments. Your debt will only increase if you do not make repayments
# Once you have started to make repayments, keep a copy of all deposits you have made and all payslips, so that you can calculate your balance between annual statements
# If you have any other debts, be sure to prioritise these repayments. Remember, the interest rates on these will be much higher.
Source: telegraph.co.uk
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