Students facing £5m financial hangover
Credit reference agency Callcredit, provider of the online consumer credit report service MyCallcredit, is warning the 345,000 students heading off to university this autumn that they're likely to graduate with collective debts of more than £5m(1) - which could have a serious impact on their future financial health.
On average each student who starts a course this autumn will graduate with debts of £15,000 - more than double the £6,161 average debt for graduating students seven years ago - and the vast majority of that debt (83 per cent) will be through student loans(1).
Callcredit industry relations director Mel Mitchley says:
"Life is financially harder for students now than it has ever been and the decisions people make about their borrowing while they are studying will impact on their finances for years to come, so it's important they have the information they need to make the right decisions for them.
Student loans offer the best value for money and automatic repayments only begin once gross earnings go above £15,000. Also, repayments are capped at nine per cent of the amount earned above £15,000, which will minimise the impact on a graduate's ability to afford other credit commitments, like a mortgage, once they leave higher education(2).
Student bank accounts offer good deals on overdrafts while people are in further education but can revert to higher rates after graduation. And credit cards are generally priced according to risk - students could end up paying uncompetitive rates as they generally have no credit history."
The mounting student debt burden has led to increasing numbers turning to bankruptcy as they believe it will allow them to wipe the slate clean - in 2005 899 students declared themselves bankrupt, compared to just eight in 1992.
"Bankruptcy is not an easy option and changes in the law in 2004 mean that any student who went down this route would still be liable for their student loan," warns Mrs Mitchley.
"And quite apart from this, bankruptcy has serious consequences in terms of current and future assets. Any hopes of future home ownership may be ruined and even something as simple as opening a bank account may become difficult."
Students' financial health guide:
- Get a part-time job to supplement your income.
- If you need credit, use your student loan facility
- Choose a bank account which extends student benefits as long as possible after graduation to allow overdrafts to be paid off.
- Check your credit file regularly - as well as giving you an overall view of your credit commitments, this will help protect you against ID thieves - a particular risk for students who have various addresses while studying.
- Check your credit score - the higher your credit score the better rates you can expect if you do apply for a credit card - you don't have to accept uncompetitive rates just because they are targeted at students.
- Join the Student Union and take advantage of travel, food and shopping discounts.
- Avoid store cards - they are typically more expensive than credit cards.
- Be cautious when entering into a joint credit agreement with flatmates, eg to buy a fridge or a television - this means you will become financially associated and if they choose not to pay you will be wholly liable for the debt.
- Take utility readings and inform the suppliers every time you move into or out of accommodation - otherwise you might be liable to pay for services you haven't used.
- Make sure you can afford any credit commitments you enter into. If you don't pay you could receive a County Court Judgement (CCJ) which will affect your ability to gain credit for up to 6 years.
- Source: The "Student Income and Expenditure Survey 2004 / 5" prepared by the Institute for Employment Studies in conjunction with the National Centre for Social Research on behalf of the Department for Education and Skills.
- The maximum student loan available from the Student Loan Company is £4,405 (or £6,170 for those studying in London) per year. In addition the Student Loan Company provides a Student Loan for Fees with a maximum of £3000 available. The current interest rate on loans is 2.4 per cent and increases are pegged to inflation.