FOOL'S EYE VIEW
Financial Graduation

By Christopher Spink
June 8, 2001

Over a third of 18-year-olds now enter higher education each year. Twenty years ago only a tenth did. That means there are more university graduates than ever before. About a million will collect their degrees in the next few weeks. This current generation is also more financially aware than its predecessors.

The class of the 1970s enjoyed full maintenance student grants to fund them through their student days. Nowadays, with tuition fees of £1,050 charged annually and loans, rather than grants, paying for living expenses, many graduates enter the world of work owing various creditors tens of thousands of pounds.

This fate may not befall Prince William, who starts at St Andrews University this October, but two-thirds of his contemporaries will have to borrow money from the Student Loans Company. Undergraduates can borrow up to £3,725 a year or £4,590 if in London.

That's worrying to say the least. Last year the Student Loans Company lent well over £1b in all. If you're about to graduate or have done so recently then you might want to brush up on your personal financial knowledge.

You may feel you're in the money when you get your first pay cheque, compared with what's gone before in your previous three years of student penury. But soon you will not only have to repay your debts but also start thinking about saving up for your pension, a house and all sorts of other living expenses.

Here are some pointers.

Look at your debts

First things first, you should concentrate on getting your debts down, or at least under control before anything else. However there are different types of debt charging varying rates of interest. You should basically try to pay off the most expensive debts, with the highest annual interest rates, first of all.

Don't pay off your student loan

Following on from the last point, don't be in a hurry to pay off your student loans quicker than you need to. Nowadays, from the April after you graduate your repayments automatically come out of your pay packet each month at 9% of your income, as long as you earn £10,000 a year. Treat this as a tax.

Student loans may look very large. But they are also the cheapest loans available by far. They only grow at the rate of inflation. This is currently 2% per annum. If inflation takes off don't worry, because the interest on student loans is capped at 1% above base rates, currently standing at 5.25%. This is still low.

Be careful of graduate loans

Your bank might be willing to lend you more money when you start your first job. These are commonly called graduate loans. They are marketed as helping you find a deposit on a flat, buying suits for work and general costs associated with starting work.

However, they are far more expensive than student loans and could tie you in with a bank you don't necessarily want to deal with for some time. Consider borrowing money instead from your employer, who may lend you money at a very low rate. Explore career development loans and other forms of assistance.

Watch your overdraft

Student banking packages offered by the main high street banks commonly allow undergraduates an interest-free overdraft up to a certain limit. This can feel like having access to free money. That's a bad habit to get into though, because such 'free' overdrafts still amount to borrowing and the free period can end abruptly.

Many start to charge interest within a year of graduation. These rates can be punitive. It's imperative to pay these down as quickly as possible. Or else consider switching accounts. First of all though you should speak to your bank manager and try and negotiate with him about your overdraft and its interest rate.

Reduce your credit card debts as a priority

Many students nowadays have credit cards. If you commonly have an outstanding balance at the end of the month, then try to reduce this as quickly as possible. Credit cards can charge very high rates of interest. But many rival companies also offer reduced rates if you switch to your balance to them. Consider this.

Plan your finances

Having got your debts under control, you are well on the way to looking after your personal finances successfully. You've effectively started off on the right foot. Now though you should go slowly before signing up to any long-term financial scheme. You have time on your side and don't need to rush.

Don't rush to take out a pension

Many financial firms might urge you to take out a pension, even when you have large debts. Try to ignore this pressure. These schemes can have high charges, which affect long-term performance. Instead assess all your options. Work out if your employer will contribute to a pension scheme. This could be a bonus which is hard to turn down.

Try and go for cheap low-cost schemes which tend to be more efficient. Stakeholder pensions, for example, can only charge a maximum of 1% in fees per year. That's half the cost of most personal pension providers. Consider ISAs which track the stock market index as an alternative way to save money over the long run.

Rent a house before buying one

Buying a house can cost a lot of money. That means you should be careful, because it will be expensive if you change your mind and move. For that reason it might make sense to rent before diving into the property market with a 100% mortgage.

Be sceptical about financial advice

Above all be sceptical about any advice people give you about finances. Don't trust anyone. And don't be afraid of asking questions. Try and learn as much about particular products as you can before taking the plunge. A good start might be to...

Buy a Motley Fool book!

Where next?

A useful website that lists all available financial products aimed at students and graduates
ISA Centre 
Get Out Of Debt