Should you get into a sweat about student loan debt?
It’s the D-word that all of us dread… debt. But are student loans any different from overdrafts and credit cards? Is there such a thing as ‘good debt’?Now, hangovers are an all-too-common part of the student lifestyle. Overindulgence on lager, gin and Jägerbombs leave us reaching for the headache pills – and shaking our fists at no one in particular.
But sadly, there’s a particularly nasty hangover that’s begun to loom over us all. And no, it isn’t caused by beer pong.
Students across the UK, who have begun studying since September 2012, are being diagnosed with the financial hangover.
The symptoms include realising that you have amassed a £42,000 bill for the privilege of taking your course. That’s considerably higher than lucky graduates in previous years, who stumped up about £3,000 for their annual tuition – a third of what it is now.
However, it’s not all doom and gloom. There are safeguards in place to make the repayments manageable, and to ensure the debt won’t haunt you forever.
Is there such a thing as ‘good debt’?
Unless you’re one of the Rich Kids of Instagram (pictured below), taking out a student loan will probably be essential. Starting or completing your university education would sure be difficult without it.
A tuition fee loan is for meeting course costs, while a maintenance loan helps to pay living costs during your studies. For students, repaying the debt which results from this loan is simply par-for-the-course when it comes to attending university.
The idea of totting up huge amounts of debt through these loans is a major worry for many of us. For some, the prospect of making repayments to the Student Loans Company out of their wages, long after university, is enough to put them off higher education completely.
In one sense, this anxiety over student loans is understandable – and being wary of getting into debt is a savvy skill. On the surface, there appears to be no positive aspects to debt of any kind – especially considering that you’ll have to pay interest on top of the amount you borrow.
That said, it’s important to remember that debt is a common and necessary aspect of modern life. All major companies and governments borrow money. And, in order to buy a house, most people will need to take out a mortgage, enabling them to spread the expense out over time.
So: not all debt should be considered to be ‘bad’. Instead of trying to avoid borrowing money at all times, 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.
Your student loan is the ultimate definition of ‘good debt’. When taking out your tuition fee or maintenance loan, you become indebted to the government’s Student Loans Company (SLC).
Unlike banks, the SLC only asks you to begin paying this long-term debt back once you are earning a specific amount.
The threshold varies depending on when you started uni. If you graduated under the old system for tuition fees – known as Plan 1 – this amount is £16,910 as of April 2014, and goes up with inflation each year.
For students who began their studies in September 2012 or later (Plan 2), the threshold will be £21,000 when you begin repayments from April 2016 onwards.
Regardless of which threshold you fall into, the interest rate on these loans is much lower than other forms of long-term credit.
The Plan 2 student loans system mean that you are charged 3% interest, plus inflation – a total of 5.5% for 2014/15.
As you are only required to begin repayments when you are earning a decent wage, and hopefully in a strong position to make them, this can be classified as a ‘good debt’. Remember these soothing facts next time you have a bout of student debt anxiety, pour yourself a cup of mint tea, listen to Enya, and breathe.
Even better, student loans will never affect your credit rating. In contrast, failure to make repayments on your credit card are recorded in your report for six years, and could prevent you from securing a mortgage in the future. Click here to check your current credit rating for free.
Of course, in an ideal world, you don’t want to get into any debt. It’s all about knowing what is a sound investment and what isn’t. There are some grey areas in relation to debt, and it’s down to you to weigh up the safest options.
Now, let’s explore ‘bad debt’. Credit cards and bank loans are prime examples, since their repayments often command high interest rates of 6% or more.
Taking one of these out when you are in financial difficulty is often a bad idea.
As a student, your income will always be fairly low, since your studies will always prevent you from working full-time. This can leave you struggling to make the minimum payments that lenders expect each month. Missing these bills leaves a nasty mark on your credit rating and can also lead to expensive daily charges – plunging you further into debt.
If you are confused about student credit cards, then you may want to read our guide to student credit cards. You can get 0% interest for 56 days on a £500 spend. This could be good if you manage your finances carefully, as it enables you to build a credit score.
The perils of payday loans
And, of course, make sure you watch out for payday loans. They can be incredibly easy to access, but the interest rates are astronomically high.
For example, if you take out a Wonga loan, the annual percentage rate is 5,853%.
Payday loans are meant to be taken over short periods of time. But when you do the maths, the interest rate over a year is eye-watering. If you were to borrow £100 for 12 months, you’d need to cough up £5,753 in interest – that’s £487.75 a month.
Our guide is essential reading if you want to understand the risks in more detail.
Student bank accounts: A knight in shining armour?
Many banks offer student accounts, with interest-free overdrafts that make bank loans and credit cards totally unnecessary.
They enable you to eat into your overdraft and spend more cash than is in your account, without any interest being slapped on to the repayments.
Now: you may be wondering why student bank accounts with interest-free overdrafts are being mentioned in this ‘bad debt’ section. This is because the 0% rate of interest does not last forever – and the hangover has to begin at some point.
As soon as your studies are completed, some banks will charge a daily fee for the privilege of having the overdraft, which is deducted from your account monthly.
Check out our great student bank account tips for more information. And, if you need any help on debt issues, be sure to email us or contact your local Citizens Advice Bureau.