Managing student debt: it doesn’t have to be overwhelming06 October 2022
For many people, debt is a fact of life. Indebtedness can start quite early, often from the student years, and can continue for a significant time thereafter, and sometimes is never cleared. This can be a concern to younger generations and to parents and grandparents alike.
As you might expect, debt management (or the lack of it) can have a material impact on an individual's goals and ambitions, not to mention their mental health. Practical steps before, during and after student life, from both a parental and a student perspective, can make a real difference, as detailed below. A lengthy blog as you can see, however, an important topic for those starting their adult life.
What does being a student cost?
The Chartered Institute for Securities & Investment (CISI) notes that the cost of being a student in the UK is currently around £22,000 for each year of study. On average, a graduate in the UK starts their working career with debt of around £45,000. However, this could be far higher for a course lasting for longer than three years.
This is a pretty daunting prospect, considering that many young people will also be trying to save for their first home, or will be starting to rent, when they begin their first 'proper' job, not to mention the emotional burdens of leaving the family home and managing their own finances. A lot going on, as you might expect.
What are the main costs of being a student?
The main costs of being a student are accommodation rental, fees for the course, living costs (food, electricity and so on) and study materials. As noted above, when taking these costs into consideration, the total expenditure for a year could be around £22,000, or significantly higher if studying in London.
What financial help is available?
There is government support available, mostly in the form of loans, and what a student is entitled to depends on a number of factors, including where the student lives, where they will be studying, the level of household income and whether the student will live at home or away from home.
In England, the maximum annual tuition fees are £9,250 per year for full time students studying at a public university or college. And the interest charge is not cheap! A student can apply for a tuition fee loan to cover the full cost of the course, and such loans are paid directly to the institution. It is also possible in England to apply for a maintenance loan, which is designed to help cover living costs whilst studying. This is paid to the student, and the amount available will depend on household income. The government website offers a helpful student finance calculator to estimate how much maintenance loan a student might be entitled to, and this will also note eligibility for any extra grants or allowances: https://www.gov.uk/student-finance/new-fulltime-students
It is important to note that different rules apply in Scotland, Wales and Northern Ireland, and further details may be found on the UCAS website as an example: https://www.ucas.com/finance/undergraduate-tuition-fees-and-student-loans
Managing student debt before, during and after university
There are a range of practical actions that can be taken by parents, wider family and the student themselves to try to minimise (or at least control) the amount of debt an individual accumulates whilst studying. We've broken these down into sections and bullet points as follows, which we hope will be helpful.
Preparation before university
- Be certain that university is the right path for you - you don't want to end up tens of thousands of pounds in debt for a degree that will not help you reach your life goals.
- Get a summer / holiday job if you can and save.
- Check what support is available to you – are you entitled to non-repayable financial support from any source?
- Check very carefully – and list – all the costs you anticipate during your years at university. Budgeting is really important as it helps to avoid unpleasant surprises. For instance, do you know if meals are provided in your accommodation, and if they are, is the cost included or is it on top of the rental cost?
- Learn to cook. Eating out is expensive…and cooking can be fun!
- For parents, start saving early: as an example, the Junior ISA (JISA) allowance of £9,000 could be an effective way of accumulating a university fund, especially if you start when the child is young. Be aware, though, that the child will have access to this from age 18, and you will be relying on them to spend it as you intended. Alternatively, you might earmark tax-free cash from a pension arrangement to help with university costs.
- Again for parents, teach your child life skills – a few simple recipes and an understanding of how to budget will go a long way.
Practical steps when starting university
- Sign up for a student bank account – look for the best deal.
- Register for schemes that offer money off travel, especially if you are living away from home.
- Apply for a National Union of Students (NUS) card which provides discounts in a range of shops and restaurants, and some services
- Join the library, and look for second-hand books, rather than buying new
- Working during the holidays, and a part-time job during term-time if feasible, can really help to reduce the amount you need to borrow.
- If at all possible, avoid taking out a credit card or a short-term loan. Both of these would usually involve very high interest rates, and debt could build up quickly. This could affect your credit score and have a lasting impact on your own future, and possibly that of others in your family if you're living at home, as the poor credit history of one individual in a household can impact on the credit scores of others.
Managing debt after university
- Repayment of your student loan only starts once you earn above the threshold of £27,295 gross pa (in England, tax year 2022/2023). Repayments start automatically – you don't control the amount that is taken. It's important to bear this in mind when you start getting your first full time payslips. Interest rates and how much you repay can be found here: https://www.gov.uk/repaying-your-student-loan/what-you-pay
- Plus, you'll see pension contributions being taken from your salary as well, owing to automatic enrolment rules, along with National Insurance contributions and income tax: you need to understand how all these factors will reduce what you take home, and therefore what you have available to allocate to bills, savings and other expenses.
- You are allowed to pay off more than the minimum amount on your student loan, and this is normally a great idea if it's affordable. However, if you have more expensive debt, such as credit cards, pay this down first, and don't defer paying other bills, such as a mobile phone contract or an energy bill, in favour of paying off your student loan more quickly, as this will affect your credit score. It's good to know that a credit report doesn't include information on student loans, so the fact of simply having a loan does not impact on your credit score.
- If you're starting to struggle with debt, don't push it to the back of your mind. Getting help early is really important. There are a range of sources of free debt advice, such Citizen's Advice and StepChange. The MoneyHelper website has a useful list here: https://www.moneyhelper.org.uk/en/money-troubles/dealing-with-debt/use-our-debt-advice-locator
As you can see, checking the 'total cost' of higher education can be vital. It's all too easy to get into unmanageable amounts of debt during a period of study, and thereafter.
However, with advance planning (life and financial), this can usually be managed successfully, with the aim of minimising borrowing and the associated costs. Parents, and indeed grandparents, can play a significant role here, both in terms of passing on life skills and in helping with university costs, whether this is through regular saving / investing for a child or through carefully planned use of their own assets, such as tax-free cash from pensions, to help the next generation.
The team at Chapters Financial is here to help with these plans and decisions.
CFP Chartered MCSI
Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.