FOOL'S EYE VIEW
Beware the Student Debt Trap

By Jane Mack (TMFJane)
September 13, 2002

Roll up! Roll up! The campaign to entice students into the murky world of finance has started. In three years' time, today's young freshers will be leaving university with a degree certificate in one hand and a letter from their bank manager in the other asking how they're going to pay back their debts.

All you need to start off life in the big wide world, eh?

If you're under 20 and you're just about to enter the university portals for the first time or if you're a parent and you're worried sick about how your son or daughter is going to cope financially in their first year, then there are a couple of things you should know – if you don't know them already.

Student debt is a big problem! According to the National Union of Students, graduates leave university with average debts of £10,000 and it's not uncommon for students to have as much as £15,000 or debt In fact, if you log on to their website, the first thing you see is an article dealing with debt problems.

When I left university in around 1994 my tuition fees had been paid for me, I'd had a maintenance grant (which included a bit extra because I was 'older') and I'd been able to borrow a series of cheap student loans from the Government. I think it was in the region of £700 in the first year, £800 in the second and £900 in the third year. When I left I didn't have to start paying it back until I was earning something like £14,000 a year. That salary 'pay-back' figure increased every year and this system continues to this day for students who took out a loan before 1998. (I've got a friend who's only just had to start paying his back after nearly 10 years now that his salary has reached £22,000 or thereabouts).

The interest rate for a Government student loan was and is a pittance – it's essentially set at the inflation rate, currently 1.3% which is hardly something to worry about. But the amount you can borrow is now very much higher and the salary scale at which you have to start paying back is very much lower. Once you start earning £10,000 a year after graduating, you have to start paying the loan back with repayments calculated at 9% of any income over the £10,000 threshold.

It's not surprising that students leave with so many debts. In England and Wales, the maximum amount of loan that you can borrow in 2002/03 is:

• £3,905 for students living away from home
• £4,815 for students in London and living away from home
• £3,090 for students living at home

Out of that you may have to pay tuition fees of up to £1,100 a year. You're supposed to live on the rest.

Of course, what most students do is supplement their income by borrowing from the bank. There are all sorts of exciting offers for students at the moment – not least because if a bank can grab you as a customer in your late teens or early 20s, the evidence is that you're more likely to get divorced at some point than to ever change your bank. No wonder they like to offer plenty of freebies to entice you to open an account.

For example, NatWest is offering first year students the chance to open a student account and they'll hand over £40 in cash or what they call a Student Starter Kit which includes a toaster, a kettle and a radio alarm clock. They also get a £10 voucher to spend at Amazon if they open an account before next Friday not to mention an instant interest-free overdraft of £1,250 and a credit card. Sounds good, eh?

A further trap students can fall into is that they can also get special rate personal loans from banks which tend to have lower interest rates that you or I might have to pay. These often get converted into a graduate loan when they leave university with the proviso that they have to pay it back within a certain period of time. Some banks also offer a free overdraft facility for both students and graduates for a stated period of time but there's no doubt that the chickens come home to roost eventually.

The essential questions any students should ask themselves before opening a student account are:

• How much overdraft facility will you really need?
• What cash machines can you use and do they charge?
• Can you bank online or over the telephone for convenience?
• Do they offer a graduate package?

For the most part any freebies are irrelevant – if you're unlikely to switch banks in your first few years with a bank account, you want one that offers a good long-term deal, particularly when it comes to a graduate package. And a debit card should be more than enough. I don't want to sound like your mother – but save getting a credit card until you've had some practice with managing all this money. Remember, you've only borrowed it and that you'll have to pay it back at some point!

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