For the majority of students today it’s not whether they’ll get into debt – it’s how much. Here are our top tips to help your children keep their debt under control.
Student debt can be a millstone around the neck of graduates. The mere thought of owing tens of thousands of pounds is enough to put many young people off going to university in the first place. With tuition fees now set at as high as £9,000 a year and the cost of living rising too, young people are facing debts of £40,000 and above by the time they graduate.
So how exactly does the repayment of student loans work, and what can you do to help your children to reduce their student debt?
1 Repaying student loans – how it works
The idea of student loans is that repayments start being made only when graduates have attained a certain level of earnings. The money is then taken out of their pay packet at source (the theory being that they won’t miss it so much).
However, for a lot of young professionals this means that if they earn a bonus, a large proportion of that extra money goes straight to the Student Loans Company, rather than into their pocket.
Fortunately, if this happens then the extra repayment can be reclaimed if your child’s annual earnings are still under the annual threshold.
It is possible to make extra optional repayments. But please be aware that although paying off debts as soon as possible is normally a financially sound decision, for most students with post-1998 loans this is not the case. This is because post-1998 loans have a rate that is less than or close to the rate of inflation, so the interest you can earn in a top bank account outstrips the cost of student loans for basic-rate taxpayers. For more information on this, we recommend that you refer to Money Saving Expert’s guide entitled “Should I repay my Student Loan?”.
You may even be tempted to do your children a favour by making extra repayments for them – but, in fact, putting this money into a high-interest savings account would, in most cases, be better for them financially.
2 Avoid other debt
Although there is not much young people can do about tuition fees, the best way to avoid piling up extra debt is simply to avoid borrowing other money as much as possible.
There is a huge amount of competition among banks for the business of students, so make sure your child takes the time to select the account with the best interest-free overdraft option. Help them to research accounts, as the finance industry can be extremely confusing for newcomers, and banks have been known to offer introductory freebies to lure in customers to an account that might not the best financial option in the long term.
Of course, in an ideal world your child would avoid going into their overdraft at all, but realistically that extra money will probably be used at some point. This means it is vital to make sure the added borrowing is not financially crippling, as overdrafts with high fees and interest rates can be incredibly hard to pay off while studying at university.
Taking out credit cards is also not generally a good idea – students should be attempting to learn how to manage their own finances without borrowing yet more cash at uni – while store cards and payday loans should certainly be avoided.
3 Budgeting
Few young people will get excited about the idea of a budget, but they are a must in order to identify and control spending habits.
Take time to help your child to come up with a realistic budget that has enough wriggle room, so they will not feel too bad if they occasionally break it. But sticking to the budget should also be a challenge – it is a fine line to tread. Perhaps you could agree a reward if they stick to the budget?
A good trick to budgeting is to encourage your child to use only cash. Spending on debit and credit cards feels less real than handing over actual paper money, which may help them to think twice about unnecessary purchases. For example, students taking a debit card on a night out could, unfortunately, mean that a drunken trip to the cash machine becomes an inevitability that will be regretted the following day.
There are plenty of smartphone apps around that can help them to build their budget, so there is no need to make a scary spreadsheet that could frighten your child off from trying completely.
4 Get a job
Working during studies is definitely one of the best ways to reduce student debt levels.
Although exams and coursework should always be the main priority, having a part-time job while at university looks great on CVs, helps young people to develop new skills and gives them vital experience for life after the world of education.
The job market is tough out there, but there are still some great opportunities for student workers. Furthermore, gaining work experience will help them when they are looking for a graduate job post university.
Away from traditional jobs such as waitressing, bar work and club promotion gigs, encourage your child to find work that will be stimulating and useful. For example, they could use their expertise from school and college to work as a private tutor, or they could start building up a freelance career in their preferred post-university field.
Student Money Saver has a range of ideas for making extra money at university in their ‘100 ways to make money’ guide.
University these days is about more than the piece of paper young people receive at the end, so encourage your students to make the most of their time at university by working.
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