Student debt - Making the most of it

Students invariably require financial support; obtaining the right loan from the best provider is important to future financial security.  It is advisable to research all the available options and seek advice on which loan is appropriate for one's individual requirements.  The Student Loans Company is directed towards students.  Some banks have particular loan products tailored to students.

The key is not to rush into anything but to shop around before arriving at a decision for your particular circumstances.

Tips and advice

  1. A student loan is one of the cheapest ways of borrowing money. Take out a student loan before you borrow through a bank. Details can be found on the Student Loans Company website.
  2. If you need extra money, shop around for the best deals. Look at the criteria that matter e.g. an interest free, charge free overdraft, good accessibility and beware of banks "bearing gifts". There may be some unwelcome surprises in the small print. "Free money" does not exist.
  3. Research living expenses and other essential outgoings to help make a realistic budget. This will help you decide whether you need to work part-time. Keep your bank informed of your financial plans and ask them for advice.
  4. Enquire about the bank's graduate banking facilities with a view to when you finish your course and need time to repay any debts.

Keeping out of debt

New graduates should use any spare cash to pay off credit cards and overdrafts first before paying off their student loan. Although you may have access to interest free overdrafts for between one and three years after graduating, it is better to pay these off first as your debt with the Student Loans Company does not affect your credit record. Details of student loans are NOT held by credit reference agencies.

Mortgage lenders are more interested in whether a borrower will have sufficient income after meeting other outgoings to cover monthly mortgage payments than the size of an outstanding student loan.

If you intend to travel make sure you let the Student Loans Company know. Repayments are not required if you are not earning whilst overseas however if you do have an income you will need to organise the repayments of your student loan before you leave.

Don't take on more than you can handle

Consider whether you can afford the repayments before you get in over your head. Maybe you can save the money for the item by putting money aside in an instant access savings account each month.

Compare rates on personal loans: the good, the bad and the ugly

If you must have a loan then make sure you get the right one for your needs. As the table below shows there is a vast difference in cost between the best and the worst around.

Cost of borrowing £6,000 over a period of 60 months (5 years)
LenderAPR*Charges for CreditTotal Repaid
Personal Loan Provider60.3%£9,945£15,945
High Street Provider5.9%£925.80£6,925.80
You save--£9,019.20

*Annual Percentage Rate

Before you apply work out how quickly you want to pay off the loan. The longer the period the lower your monthly repayments but the more interest you will be paying overall.

There are also a few tricks that make comparing personal loans more difficult than it should be. When comparing loans always compare the monthly repayments quoted by the lenders' loan calculators. This is a much better guide than the APR advertised as it depends on how much you want to borrow and your credit worthiness. Also, different loan companies have different ways of calculating the interest costs.

Bankruptcy: a soft option?

You may have heard that the option to declare yourself bankrupt to avoid having to pay back your student debts was a fantastic escape route, however, there is more to declaring bankruptcy than simply clearing your debts. Graduates who take this route will have to face serious consequences which will affect their future careers including possibly being barred from some professions e.g. law, police, and accountancy.

Student loans are now exempt from bankruptcy laws so will not be cleared under any circumstances. This means that even if you do declare yourself bankrupt you may still have to pay your debt and possibly at a higher rate of interest.

A bankrupt person cannot incur credit of more than a certain amount during the course of the bankruptcy without declaring their bankrupt status to their lender. This means it will be difficult to obtain a mortgage, an overdraft and hire purchase. Any future credit that is granted will be very expensive. A harsh long term price to pay for the short term relief of avoiding student debt.

Your bank accounts will be frozen and any life insurance policy taken out will be seized. Currently the period of time to be declared a bankrupt is one year. However your credit rating will be damaged for a long time thereafter.

Topics

  • Guidance
  • Insolvency

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