Poor students in hock to loan arrangers

It can’t be fair that undergrads face rising debt, writes Jeff Salway

Scotland's students are leaving university with increasing levels of debt, up 6.3 per cent according to the most recent figures. Picture: Ian Rutherford
Scotland's students are leaving university with increasing levels of debt, up 6.3 per cent according to the most recent figures. Picture: Ian Rutherford

Pressure is mounting on Holyrood to help ease the debt burden facing students in Scotland after a fresh rise in the number taking out loans to finance their studies.

Students in Scotland received more than £780 million last year in the form of financial support such as loans and fees, according to Student Awards Agency Scotland (SAAS), up 6.3 per cent on the previous 12 months.

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The latest figures from SAAS highlighted the size of the challenge facing students in Scotland who are unable to rely on generous parents to help them financially.

The increase in financial support was driven by a 9.1 per cent spike in student loan payments, with £468.8m paid out in 2014 despite Holyrood’s free tuition policy. The biggest student loan debts are borne by those from the poorest backgrounds, who have suffered from a cut in the amount paid out in grants and bursaries.

Just 52,135 students received grants and bursaries in 2014-15, at an average of £1,220 per student, compared with the average of £1,850 paid to 68,960 students in 2010-11. Lucy Hunter Blackburn, of Edinburgh University, has estimated that reductions in grants and bursaries in recent years has effectively transferred some £20m a year from low income students to those better off.

It’s no surprise, therefore, that dependence on student loans is growing. However they’re preferable to most other forms of loan, pointed out Pamela Muir, head of restructuring and insolvency at law firm Morisons LLP.

“If you can manage it try to get by on student loans. Many lenders want to attract the student pound so they will offer them loans, overdrafts and credit cards,” said Muir.

More than 6,000 students north of the Border have taken out payday loans and other forms of short-term, high cost debt to cover their costs according to Unite Students, the accommodation provider.

But while student loans can be deferred for longer than other debts, there’s still a risk of thinking about student loans as ‘nice debt’, said Muir.

“However, the more debt you accumulate the longer this will take to be repaid,” she said.

“If you told students that they might still be paying for their education costs when they are in their mid-30s it would be a shock.”

Scottish students – and English and Welsh students who started before 1 September 2012 – don’t have to begin repaying their loan until they’ve graduated and earn more than £17,335 a year (a figure set each April).

Once the repayments begin they are taken straight from salary at a rate of 9 per cent of income and can continue for up to 35 years, after which point anything left unpaid is wiped off. Repayments stop if earnings fall below £17,335, the borrower is unemployed or takes a career break.

But the challenge for today’s students is to minimise the amount of debt that builds up during their university years.

“Day-to-day living costs can mount up if you don’t keep an eye on them,” said Muir. “Learn to budget early on and it is a good skill for the rest of life.”

The difficulty in keeping costs down is exacerbated by high rental costs, particularly in university locations such as Edinburgh, Glasgow, St Andrews and Aberdeen.

“Landlords know they have a captive audience who want to live near the university, which is usually in the centre of town,” said Muir. “These costs can be punitive and many parents may struggle to contribute to rents, which will increase the level of borrowing required by the student.”

The size of the debts many students leave university with can make them harder to face up to. But it’ll be quicker to clear them if the most expensive debts are repaid as soon as possible.

“Credit cards, if you have succumbed, should be cleared immediately and any outstanding loans or overdrafts with banks should be cleared as soon as possible,” said Muir.

“Make it a priority to reduce your debts as quickly as possible. Try to apportion a percentage of your income to debt reduction and stick to it.”