The ultimate guide to student debt (and how to get out of it)
It's the ‘D' word that everyone dreads, but should you be so worried? The key to dealing with debt is really understanding it – that's where we come in.
It's fair to say that students are certainly no strangers to debt. This year, maintenance loans have replaced grants, but loans still aren't stretching far enough to cover rising living costs in the UK.
Not only this, but tuition fees are set to rise again from 2017, meaning students are forced to borrow more now than ever.
But are student loans really worth sweating about? And are some debts more dangerous than others?
Regardless of the type of debt you're in and how much you owe, the key to climbing out of it is to make sure you completely understand it – including repayments, interest rates –warts and all.
This might sound like a no brainer, but admittedly sometimes it's easier to just borrow money with the intention of thinking about it ‘properly' later. This stuff can get boring and complicated, so we don't blame you either!
We're here to give you the ultimate guide to understanding the debt you're in so you can stop stressing about it and begin taking steps to get yourself out of it.
What’s on this page?
Before we move on to talking about debt more generally, it's worth first clarifying that there's a big difference between student loan debt (so your maintenance loan and tuition fee loan combined) and other forms of debt.
Whilst it's only natural that you'd feel the weight of graduating with a large lump of debt over your head, often the psychology of knowing you have the debt is the hardest part.
In our National Student Money Survey this year, 2 in 3 of you told us you didn't understand your student loan agreement. Whilst we would never describe student loans as a ‘good deal' and we certainly don't agree with the interest rates currently charged on them, for the sake of your mental health, we think it's worth clarifying a few things about why these loans are different.
4 perks about student loan debt that makes it different from other debt:
You only repay once you're earning enough
Unlike any other forms of debt, student loan debt takes into consideration how much you earn and bases repayments on this figure.
Part of the student loan agreement is that graduates don't have to repay a penny of their loan until they're earning £21,000 a year and over (if you started uni before 2012, you start repaying when you earn £17,355). Many graduate jobs offer salaries of less than £21k, meaning you might not begin paying your loan off until a few years after uni.
Your repayments only go up if you start earning more
Similarly, exactly how much you pay back each month is directly tied to your salary. No matter how much you're earning in your job, you will only ever pay back 9% of anything you earn over £21,000, meaning the only way your repayments will go up is if you've got more cash coming in.
In this sense, it's easier to think of student loan debt as a monthly student tax instead.
If you're out of work, repayments stop
Unlike other forms of debt, the fact student loan debt is so tied to your earnings means that if your salary drops below the £21,000 repayment threshold, or you're unemployed at any point, the repayments will stop automatically and only resume once you're earning again.
This is quite different to other forms of debt, which don't tend to take into consideration a person's financial situation and what they can afford to pay back.
This is what can make debt extremely stressful – when you have repayments to keep up with but no money coming in to support it. This will never be a problem with your student loan.
Your debt is wiped after 30 years
This really is the saving grace of student loan terms to a large majority of students. Accumulating interest might be a horrible sight to behold on your statements, but remember that the chances of you reaching the point where you're onto paying off accumulated interest before the 30 years are up are slim.
In fact, a study by the IFS predicted that more than 70% of students under the current student loan system will never pay their loan back in full.
The only situation in which you might end up paying everything off is if you enter into a high-paying job as soon as you graduate (in which case, you could say you're education was worth all that cash anyway, right?).
Use our student loan repayment calculator to see if you're likely to ever come close to paying your student loan off before it's wiped.
Warning: The terms can change after you've signed
Ok, here comes the bad news – as the situation currently stands, the government have included a clause in T&Cs of student loans that permits them to make changes to the loan terms at any point, even on contracts that have already been signed.
You might have heard that the government recently made a retrospective change to student loan agreements that had already been signed by millions of students in the UK. The change involved freezing the repayment threshold (mentioned in point 1 of this list) at £21,000 until 2020, when it was originally agreed that it would rise along with average earnings.
This means that as inflation naturally goes up over time, it should in theory become easier for graduates to start earning £21k as soon as they leave uni, and as a result they start paying their loans back earlier and quicker than before.
Now that we've established we can stop sweating so much about student loan debt, let's move on to the pros and cons of other types of debt (believe it or not, debt pros do exist!).
First of all, it’s important to remember that debt is a common and even necessary part of modern life.
To buy a house, most people will need to take out a mortgage; to get a university education, most will take out a tuition fee loan, and this isn't a bad thing at all.
Therefore, not all debt should be considered negative. Instead of trying to avoid borrowing money completely, you just need to know the types of lenders to avoid – companies that can lead squeezed borrowers into a world of compounded interest rates and a dangerous debt spiral.
As weird as this might sound, there are some kinds of debt that can actually be good for your finances. Not convinced? Let us explain…
‘Good' debt is best summed up as the kind that you can realistically afford – so debt that doesn't involve crazy amounts of interest piled on each month, and that you've researched and budgeted for beforehand.
Other types of good debt are the kinds that can actually improve your credit rating when you prove you can repay responsibly – as a result, this kind of borrowing can actually make it easier for you to qualify for bigger loans like getting a mortgage.
Credit card debt is a great example of this: as scary as having a credit card can seem, as long as you set up a monthly repayment plan and stick to it, credit cards are the best way to demonstrate that you're able to repay your debts responsibly.
Make sure you go for a 0% credit card, otherwise you'll have to pay interest on what you spend. There are so many 0% credit card options out there, so it's just a matter of doing your homework!
The information accumulated from credit cards will then be shared with credit companies, who will in turn share it with banks when you apply for loans in order to confirm whether you're like to repay responsibly if you borrow large amounts of cash.
Something that remains relatively unknown amongst young people is that having no credit rating at all can be just as bad as being in debt where banks are concerned.
If you've never had a credit card before and tend to prefer sending cash to your flatmates for household bills rather than volunteering to be the one who pays them, it's likely that your credit score will be pretty non-existent.
We've got a great guide on how to check your credit rating for free and how to work on improving it if your rating is low – including prepaid credit cards specifically catered to improving your rating.
Bad debt, on the other hand, can be categorised in two ways: debts with high fees and interest rates and debts that you will struggle to repay (and so should never have taken out in the first place).
A typical example of bad debt that students often get sucked into would be the infamous payday loans, banks that charge high overdraft fees and credit cards with high interest rates.
Some credit cards will charge as much as 18% interest, and payday loans as much as 1,500%! Ouch! Unfortunately, the financial products that offer the highest interest rates are normally the easiest to access, so please approach them with extreme caution!
As a student, your income will always be fairly low since your studies will restrict the amount of hours you'll be able to work. This can leave you struggling to make the minimum payments that lenders expect each month.
Missing repayments can leave a mark on your credit rating and can also lead to expensive daily charges – plunging you even further into debt.
Now that we've explored the good, the bad and the ugly of the debt world, it's time to delve into the details!
Many banks offer student accounts that include arranged interest-free overdrafts. An overdraft is an agreement you have with your bank that you can spend more than you have in your account, and typically you won't pay it back until after you graduate.
Generally, your overdraft limit will be somewhere between £1,000 and £3,000 – depending on your credit rating.
The great thing about a student overdrafts is that you don't pay any interest on what you've borrowed while you're studying, but you will have to pay it back at some point.
With a regular bank account, banks will normally charge a daily fee just for the privilege of having the overdraft, plus interest, which is deducted from your account monthly.
Take a look at our top student bank accounts to see what the best deals are for students at the moment.
How to clear it
Once you graduate, it's likely that your student account will be converted into a graduate account. These accounts will normally include a 0% overdraft for 3 years, but the overdraft amount will taper off year by year to encourage you to start paying it off gradually.
It's really important that you check what your repayment conditions are when you take the graduate account, as if you struggle to pay off in time you could be hit with fees.
Make sure you read up properly on graduate accounts and shop around for the best one (don't be fooled into thinking you need to stick with the same bank you had your student account with, as this is certainly not the case!).
We've got everything you need to get started on paying off your student overdraft with a graduate account right here.
Credit cards and store cards
While we often harp on about the bad side of credit card debt, as discussed earlier in this article, credit card debt can help build your credit rating if you set up repayments properly. For a full run down of why you might want to get a credit card and the best deals out there, check out our complete guide.
However, we only recommend you apply for a credit card if you are confident you'll be able to keep up with repayments – otherwise, they can seriously damage your financial health.
Store cards, on the other hand, should pretty much always be avoided at all costs. Many shops will try to lure you in when you're at the till be offering you a discount on your purchase if you sign up to a store card, which is sort of like a credit card that can only be used in that specific store.
These cards are incredibly dangerous as they encourage you to shop when you don't have the budget for it (and they of course encourage you to shop in that specific store rather than others, which is why staff are told to work hard to convince you to sign up!).
It's worth remembering that commercial financial products such as these tend to carry very high interest rates – usually around 20% – and encourage shoppers to get into the mindset of ‘buy now, worry about it later' which is how serious debt issues arise.
How to clear it
You can either pay all your purchases off at the end of the month or arrange to pay back in monthly instalments. Remember that if you opt for latter you'll be charged interest (unless you qualify for a 0% interest credit card, of course!).
Not paying on time could lead to hefty fines can also affect your credit rating, so it's a great idea to set up a direct debit to pay off a fixed amount automatically each month before you hit any issues.
Check out our guide to student credit cards for more guidance on how to use credit cards to your advantage, and how to get yourself out of the red.
We hope that most students are aware of just how bad an idea payday loans are, and avoid them like the plague! A payday loan is a small loan that can be taken out over a short period of time with very few questions asked.
Generally payday loans are seen more as an advance on your wages if you need it, and therefore you're expected to repay it within the month (typically once you’ve been paid, hence the name).
The problem with payday loans is that they can be incredibly easy to access (sometimes all you have to do is send a text!) but the interest rates are astronomically high. In fact, they're considered to dangerous that they've now been banned from advertising on Google, along with firearms and drugs!
It's also worth being aware that there are some private companies that target students specifically by offering cash to supplement maintenance loans – but approach these companies with extreme caution as they have huge interest rates.
Don't assume that just because their target market is students, they'll cut you any slack when it comes to repayments! You'll be expected to start paying the loan off pretty much as soon as it hits your bank account.
Our guide to payday loans will give you the full lowdown on interest rates and safer alternatives.
How to clear it
Payday loans can become pretty expensive when you don't stay on top of them: not only can they charge insane interest rates, but you also get additional charges every time you miss a payment date. Unfortunately, that makes it the kind of debt that can spiral out of control very quickly. If you're struggling to stay on top of repayments, don't just stick your head in the sand – get expert advice, especially before borrowing from other lenders to plug the gaps.
So university debt isn't just about repaying your tuition fees and student loan – which, as we covered earlier, you've got all the time in the world to pay off!
There are other debts that you can end up incurring at uni, and they can have bizarrely drastic consequences if you try to dodge them. Believe it or not, just recently a few unis were named and shamed for preventing students from graduating if they had non-academic debts such as library fines or negative print credits!
For short term loan books, fines can be as much as 50p an hour, which adds up to a whopping £12 a day. As ridiculous as these charges are, this is a neat little wad of cash for unis so they're likely to go to whatever lengths they can to get what they're owed.
How to clear it
First-up, check if you need to return or renew any overdue books! If you've built up fines you can't afford to clear, have a word with the library, your academic department or Student Support for ways to manage it (or write it off..).
We've also heard through the grapevine that some universities allow students to half one of their fines each year so if you have a hefty library debt, this could be your saving grace!
Bills and utilities
These are all the grown up things you have to pay for when you move into your own house. This includes things like gas, electricity and water.
Take our word for it in this one and avoid debt on your utility bills at all costs. If you fail to pay up you could end up having your power cut (except water), ruining your credit score or even worse, end up in court.
When sharing a property – choose your housemates wisely! If your name is going to appear on bills and rental agreements, you'll be liable for your share; if yours is the only name on an agreement and your flatmates disappear and leave you in the lurch, unfortunately you'll be liable for the lot!
If you've been contacted by the TV licensing company to say you should be paying for a licence when you don't have one, there's a chance you might not have to pay if you're a student. Read this to find out if your situation applies!
Don't forget that if you're a full time student in the UK, you will qualify for council tax exemption but you must apply for it – here's how!
How to clear it
If you do find yourself in a bit of hot water, don't leave the problem to fester! As always, get expert advice if you need a plan for paying off what you owe.
If you're in arrears with your rent on a student property, you may be able to come to an arrangement with your landlord to repay in instalments. If you don't, they could pursue court action, which can make it more difficult for you to rent accommodation or borrow money in the future.
If you're in arrears with your gas and electricity bills, these companies have a code of practice that allow you to pay what you owe in affordable instalments. But again, don't ignore this debt as if you're perceived to be running, they might send you a court summons.
Your friends and parents
Friends and family can often be a source of cash as well as emotional support in your time of need, and there's nothing wrong with that.
The only issue is when it gets to the stage you know you need to repay them but you're stressing because you don't have the funds. The key to solving this solution is to recognise verbally to them that you know you owe them so they don't think you're hiding from the responsibility.Did you know the government expects your parents to contribute as much as £5,372 a year to your uni living costs?
How to pay them back
If you're borrowing from the bank of mum and dad, or your mate's wallet, you might be tempted to think there's no real urgency to pay them back.
However, if you become a regular borrower who never pays back, they might simply stop lending to you. Not only does it put a real strain on your friendship, don't ruin your chances of ever being able to count on their help again, as you never know how badly you might need it.
Don't wait until it's a problem: start with a repayment plan you can manage (smaller installments or flexible dates – whatever works for you).
Struggling to understand a type of debt that isn't covered in this guide? Do let us know and we'll see if we can add it to the list.
If you're particularly struggling with your debts, read our guide on how to cope with a cash crisis which includes a list of services you can reach out to for help.