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One of the most harrowing parts of graduating from university is when it is time to deal with student debt. If you’re anything like many of your peers, you could be leaving university with £44,000 of it.
Many people are never able to repay their student loan. Instead, it becomes a tax on their income that continues until it is wiped. Yet if you feel ambitious, you could join the 30% of students that do manage to clear all their debt.
If you want to learn how to deal with student debt, read on!
Minimum requirements for student loan repayment
If you started university after September 2012, then you do not need to make repayments until you are earning more than £21k.
Your student loan repayments are automatically taken out of your income. 9% of what you earn, above the minimum repayment threshold, is taken before you receive it. Student loan repayments are much like a graduate tax.
If you are earning £25k then you will need to repay 9% of £4,000. That means that you will pay £360 a year, or £30 per month, with the money taken straight from your pay.
Other types of student debt
As a graduate, your student loan might not be an immediate concern. It is a debt that sits in the background until you’re earning a certain amount.
Unfortunately, many young adults find themselves in other types of debt. These are immediately more important.
Student and graduate bank accounts
Student accounts can be tempting when you’re studying at university. They usually come with interest-free overdrafts.
Many are promoted with free gifts including student railcards, gift vouchers, and discount cards.
Students can end up in relatively large amounts of debt, having not about thought making repayments.
It is easy to avoid thinking about how to deal with student debt when there are no immediate charges and the credit facilities are readily available.
With Nationwide, you could end up owing £3,000 in the form of a student overdraft. This is not free money, and as a graduate, you will need to repay it.
Bank accounts after graduation
Once you leave university, the bank will automatically convert your student account to a graduate account. You will be expected to repay your overdraft.
With Nationwide’s FlexGraduate account, your £3k overdraft drops to £2.5k after one year. It reduces to £1,750 after two years, and £1k after three years. During this time, you need to be making repayments to stay within your overdraft limits.
Usually, graduate accounts ease you slowly away from your student years. Your overdraft is likely to remain interest free.
Your goal should be to clear your overdraft as soon as possible.
Furthermore your graduate account will soon convert into a standard current account. At this point, you will be subject to interest and charges.
The co-operative bank offers a student overdraft of up to £2k, but with only one year on a graduate account to repay your debt in full. Your overdraft limit does not automatically get added to your new current account. This means that you must repay £2,000 of debt in one year.
Many people use their student overdraft out of necessity, or because the deal seems too good to be true. After graduating, they need to quickly form good debt repayment habits.
Short term and payday loans to deal with student debt
In 2014, the NUS reported that 46,000 undergraduate students had made use of payday loans.
These figures are less likely today. The FCA tightened lending restrictions from January 2015.
Today, many of those students would not pass affordability assessments. Still, there are new graduates that may have been included in those 2014 statistics. Some may be dealing with the ongoing effects of using short term loans during their time at university.
Credit cards to deal with student debt
As is the case with student bank accounts, there are student credit cards available.
Whilst student overdrafts typically offer a better deal than the standard, the opposite is true of student credit cards.
Though they’re marketed at students, these cards often have high interest rates. The Halifax student card has a representative APR of 19.9%. Meanwhile, Halifax’s most expensive standard credit card comes with a published APR of 18.9%.
The same figures are true with Lloyds Bank.
Student credit cards are normally designed for people with poor credit. Most students have not built up a good credit score. As a result, these can be an expensive way to deal with student debt for young people.
Repaying your student loans
Student loan debt is wiped, 30 years after graduation. This is the case whether you have spent your three decades contributing, or have not paid off a single penny.
Some people will never make a payment towards their student loan.
Most people will make student loan repayments, in the form of salary deductions, until the debt is wiped.
Less than a third of graduates will completely deal with student debt.
If your income rises above £21,000, but later drops again, then your repayments will not continue. The amount that you repay will rise and fall, based on how much you are earning at the time.
The amount of student loan debt is irrelevant for a majority of people, who will never pay in full what they owe.
Someone that borrows £9k will likely have to start on a salary of £45k. Also, they will have regular salary increases in line with inflation, to repay their debt in full. Even then, they will be making final payments just before the debt is due to be wiped.
Maintenance loans (for living costs) are bundled up with tuition fee loans. This means that there are no separate repayments to make.
Usually, it is best to take the maximum student loan available to you. This is debt that is controlled and managed so that it never becomes crippling.
Other types of debt including credit cards, overdrafts, and other loans are far more dangerous forms of credit.
How to deal with student debt
Prioritise your debts
If you’re graduating with various types of student debt, then you will need to prioritise your repayments.
Almost certainly, your student loan will drop to the bottom of the list.
Student credit cards are high interest forms of credit, in comparison to other types of debt. You will probably want to focus on these first.
However, always keep in mind that a graduate overdraft is a debt on a deadline. If you cannot clear it in time, you risk being forced into an expensive unarranged overdraft. Or, at least, you’ll have typical daily fees and interest.
What if you have a £2k overdraft with the co-operative bank, and it is suddenly cancelled? Well, your remaining debt will be subject to an 18.9% APR and an extra £10 monthly service charge. If you continue to spend, you will be charged £10 on any day that your overdraft increases.
When a graduate account is converted to a standard current account, it can suddenly become your most expensive debt. You can quickly get pushed into a debt spiral. If you have a graduate account with a deadline, be sure that you can repay your overdraft in time.
When repaying your debt, work out how much each will cost in the short-term and the long-term. Use this to decide where to focus your immediate efforts.
Create a personal budget to deal with student debt
You cannot successfully manage your money, without a budget in place.
Calculate your income from all sources. Work out how much you are spending. Your budget should list all types of expenditure.
Make sure that your income figure is higher than your expenditure one.
Any money left over can go towards paying off your debts, excluding your student loan which is paid automatically.
Start on the right foot. Open a savings account and build a buffer for emergencies.
It is generally said that you shouldn’t save whilst in debt because your debt will cost more than your savings are earning. This is usually true, but remember that setting some money aside for a rainy day will stop you from needing to rely on debt in future.
Check your budget regularly. See if there are ways to reduce your expenditure, or perhaps increase your income.
Seek help to deal with student debt
If you are struggling to manage your debt, then there are debt charities that can help.
It can be embarrassing to need debt help as soon as you enter the world of work, but your circumstances are not unique. Many other graduates will be in your position.
Upon graduation, people are often struggling to find stable employment. You will not be the only person beginning your adult life jobless and in debt.
Debt charities, such as StepChange, can help you to manage your financial commitments.
Graduating in debt is the reality for almost every university student. Managing debt can prepare you for future financial success.