Parents should study options to cut student debt

Published on Sunday 17 April 2005 01:14

DEBT has become a fact of life for students, and this sense of resignation leads some to close their eyes to the cost it incurs. Although the big banks claim to be lending responsibly and not making too much credit available to rash undergraduates, students are faced with an array of offers during Freshers’ Week.

Many go on to choose their banks based on a series of discounts which are worth far less than the punitive charges on unauthorised overdrafts.

The free curries offered by Lloyds TSB have to be weighed against the massive 29.8% interest on unauthorised overdrafts. By comparison, HSBC charges 14.8% and offers a five-year railcard.

What students need are flexible and cheap overdrafts, low fees and easy access to cash machines. Choosing the wrong combination and, even worse, taking out a credit card, can add thousands of pounds to the loan.

And with the news that British students will be saddled with total debts of 2.4bn when they graduate this year, the sums at risk are considerable.

But it is not only the students who are struggling. Even forward-thinking parents who took out sensible plans in early adulthood to fund their children’s schooling found themselves shelling out large sums of money when student grants stopped and tuition fees became payable.

For them there are a variety of measures available to help their children, including selling assets, working for longer and taking on more debt.

Financial planner Duncan Glassey believes the prospect of funding children for an unplanned four years can force a necessary spring clean.

"The first action parents should take is to review all their investments and consider selling off any poorly performing shares," says Glassey.

"They may have kept some shares for sentimental reasons - particularly if they were an inheritance. Sell them, cut your losses and help free your children from their student debt."

Top of the list for capital-raising exercises, according to IFA Philip Church, are mortgages. He recommends getting a flexible mortgage. "This allows you to write a cheque for your children’s needs. Mortgages are easy and cheap - much cheaper than an overdraft. If really pushed, sell your Isas," he says.

"But be careful with your pension - it should be bottom of the list. Most parents facing the problem of unexpected university costs will be aged around 50. The last 10 to 15 years of your working life are crucial if you have a final salary pension scheme. If you’re in a defined contribution scheme, you could consider reducing your contributions."

For shorter-term loans for smaller amounts, a personal loan may be the solution. Research from Moneysupermarket.com shows that a parent borrowing 10,000 on a personal loan at 5.7% APR over five years would pay back 11,486.

If the house were remortgaged, using a 5.15% tracker for the term of the mortgage, the extra cost could be as much as 2,888. A loan with a fixed rate would also protect the borrower from any interest rate hikes.

Many trusting parents are standing as guarantor to their children’s debts - a prospect many will find alarming, but which can help avoid hefty unauthorised overdraft charges.

New mortgage products allow parents to stand as guarantor for their children’s first house purchase.

Finally, the old favourite - buy-to-let mortgages - are still an effective way of minimising accommodation costs. Many are self-funding and offer parents the chance of a capital gain.