COMMENT
Young Adults Face A Debt Disaster!

Life for students is a lot tougher financially these days, compared to when I went up to University in the late Eighties, which was the life of Riley in comparison.

During my three-year course, I received a student grant of approximately £2,500 a year towards my living expenses. This was non-repayable, plus there were no top-up tuition fees (coming next year in England), student loans or other hefty fees to face. Then again, my social life swallowed much of my grant, so I ended up around £5,000 in the red by 1990. Whoops!

It's a completely different world for today's students. Grants were phased out in the Nineties, being replaced by student loans. And, according to the Student Loans Company (SLC), young adults owe it a massive amount. In the nine years until 2003/04, total debt owed to the SLC increased from £1.9 billion to over £13 billion – almost a sevenfold increase.

The average student debt to the SLC was £8,430 in 2003/04, compared to £3,530 in 1999/2000 – up £4,900 in just four years. However, there's one piece of good news for students from low-income backgrounds, as new maintenance grants of up to £2,700 will replace maintenance loans. Nevertheless, the high financial cost of going to University must discourage some bright youngsters from modest backgrounds from going into tertiary education.

Student loans are good value when compared to commercially available loans, since their interest rate is linked to the rate of inflation (rising prices). In effect, the 'real' rate of interest (after account for inflation) is zero, whereas bank loans and credit cards charge market rates of interest. Another bonus is that students do not begin repaying their SLC debt until their annual earnings exceed £15,000.

Recently, I was chatting to two young undergraduates in my local pub, one of whom is graduating very soon. One explained that, on top of his SLC debt, he owed roughly £2,500 on a credit card, plus his bank account was in the red to the tune of around £300.

These extra debts didn't surprise me one bit – in fact, I admired this chap's restraint. On our ever-popular Dealing with Debt discussion board, you come across young graduates with debts of £25,000 or more, spread among the SLC, credit and store cards, personal loans, overdrafts and so on. I gave my student chum these two pieces of advice:

Avoid consolidation loans

Don't roll-up your debts into a consolidation loan, except perhaps a discounted-rate graduate loan from your bank. One Foolish survey revealed that five out of six borrowers (85%) run up more debts after 'clearing' (hah!) previous debts with a consolidation loan. I can't see the point of using one debt to pay off others, unless the new debt is considerably cheaper – and, of course, the borrower changes their ways and spends less than s/he earns. Learn more in The Dangers Of Rolling Up Your Debts!

If you want the UK's cheapest personal loan, check out our exclusive rate!

Kill your debt with a 0% card

The minimum monthly repayments on my young friend's are a fiftieth (2%, at least £5) of his monthly balance, which come to around £50 at the moment. The horrible truth about making low minimum monthly repayments is that your debt can take a lifetime - forty years or more - to pay off, as I explained in The Day That Credit Cards Turned Nasty. That's because most of your monthly repayments go towards paying interest, not repaying capital.

For example, my student acquaintance's credit card charges an annual interest rate of, say, 15.9% APR. This equates to a monthly interest rate of around 1.24%. So, when he repays £50 of his bill of £2,500, only about £19 is chipped off his debt, with £31 going towards his interest bill. It would take almost 32 years to repay this £2,500 by minimum monthly repayments. What's more, the interest bill would be a whopping £3,814, making the total amount repayable a handsome £6,314. Hell's teeth!

My advice was to become a '0% card tart' by transferring his existing balance to a credit card that charges no interest on balance transfers for an introductory period. For example, the Best Buy Virgin Money 0% card - available via the Fool - charges no interest on transferred debts for nine months. Its minimum monthly repayments are 2.25%, with every penny going towards paying off debt during the first nine months.

I finished by suggesting that my student companion apply for another 0% card before each deal ends and surfs the debt from the expiring 0% deal to the next. In effect, he has an interest-free loan as long as he can keep getting a new 0% card every six to nine months or so. And, with a fixed monthly Direct Debit of, say, £57, his 0% debt will be cleared in less than four years, without paying a penny in interest. Now that's what I call a good deal! Learn how to beat the system in Ten Tips For Cunning Card Players!

With exam results due any day now, I'm keeping my fingers crossed for all my student chums!

More: Check out the deck of 0% cards in our Credit Card centre | Apply for Britain's cheapest personal loan.