Students could take a decade to pay off debts

Published on Friday 10 July 2009 20:24

MORE than two thirds of Scottish students expect to spend at least ten years paying off their debts after they graduate, new research has claimed.

The study, by the Association of Investment Companies, found that 4 per cent of Scottish students expect to graduate with more than 20,000 of debt, while a further 38 per cent believe their debt could reach 10,000 by the time they graduate.

The size of the debts, combined with bleak job prospects in the current economic environment, mean 68 per cent of Scottish students believe it will take a decade to pay them off. Consequently, 23 per cent of Scottish students will put the size of the salary above the nature of the role when it comes to looking for work.

Wes Streeting, president of the National Union of Students, commented: "Unfortunately, students are already racking up thousands of pounds of debt, and with graduate job prospects at an all-time low many of them will be unlikely to be able to pay this debt off for years to come."

Finding a job isn't the only challenge now facing most graduates. Student loans may not have to be repaid until a certain level of earnings is reached, but credit card, overdraft and store card debts need paying off, particularly those charging high interest. Similarly, debt consolidation is not the easy way out that it used to be, loan costs are creeping up and banks are less sympathetic towards debtors than they used to be.

Graduates can take steps to get their finances under control, however. Here's how:

1 Don't panic about your student loan

Repayments of 9 per cent of income are deducted from your monthly salary but only once you're earning at least 15,000 a year.

And the interest charged on student loans will be cut to zero in September, as the rates are based on the retail prices index (RPI) measure of inflation for the previous March. As RPI fell to -0.4 per cent in March, the Student Loans Company (SLC) is to exercise its right to cut the interest rate to zero, rather than actually pay money out to students.

The SLC said the average Scottish student owes 5,765, with the rate cut saving them around 220.

Student loans are not commercial loans so if you have an overdraft or credit card debt you should pay those off first.

2 Repay the higher interest debt first

Debts such as overdrafts and credit cards should be paid off as soon as you start work as the interest rates can be sky-high, said Paul Lothian, director of Verus Chartered Financial Planners in Dundee. "Those who find themselves graduating with large debts and no job can find themselves in an awful position. While some lenders will allow repayment of loans and overdrafts to be deferred, many will not and those that do often don't give much latitude."

Avoid using your credit card to borrow and ensure you pay off the amount you've spent in full every month, advised Sue Hussin, investment adviser at Johnston Carmichael Financial Services. She added: "Take advantage of interest free balance transfer deals to switch to another card although you will normally have to pay a transaction fee, for example, 3 per cent of the balance transferred."

3 Check out a graduate account

With competition among banks for new graduates fiercely fought, even in this climate graduate accounts can represent good value, so it's worth both checking out what your bank can give you and shopping around for better deals elsewhere. Many graduate accounts, including those from RBS, Lloyds and Abbey, offer interest free overdrafts up to 2,000 for three years. But straying over the overdraft limits can incur expensive interest charges.

Loan rates on graduate accounts are usually preferential, so it could be worth using one of these to consolidate the more expensive debts you've accumulated on credit and store cards. HSBC currently charges 8.9 per cent on its graduate loan, available for five years after the end of full-time education. However, you would typically have to hold a current account to benefit from a bank's graduate loan deals.

4 Budget

It may seem boring but the best way to manage your finances is to know exactly how much money you have coming in every month and how much you are having to spend, said Ms Hussin. By doing that you can identify where savings and spending cuts can be made.

"If you spend less than you earn, it will be easier to repay any student debts and start saving for such things as a car, holiday or deposit on a house," she explained.

"Try to set yourself a limit for your weekly spending and only go to the bank once a week to draw money out."

5 Move back home

More students are now returning to their family home and for longer periods, to save on the biggest living expenses, such as rent, and to ease the debt burden. Few students can realistically think about buying property, even with house prices lower, and large debt repayments will often also rule out renting. "Their parents are now referred to as the 'sandwich generation', as they are often also financially encumbered by one or more of their own parents," said Lothian.

SEEK ADVICE

IF YOU are having problems managing your debts, don't ignore the problem and hope it'll go away – get advice as soon as you can.

Organisations including Money Advice Scotland, Citizens Advice Scotland, National Debtline Scotland and the Consumer Credit Counselling Service offer free debt advice.

&#149 Citizens Advice Scotland – www.cas.org.uk or your local bureau

&#149 www.national debtline.co.uk /scotland 0808 808 4000

&#149 www.money advicescotland. org.uk/ 0141-572 0237