Debt. That’s one of the most pressing financial worries for parents watching their children fly the nest this autumn.
It varies a lot, but the average student graduating in next July will find themselves with £23,000 of debt, according to university research site Push.co.uk.
That sort of figure is regarded as normal these days but the sums can go much higher; according to the Student Loans Company some students rack up £60k by the time the leave.
But don’t despair. Much of this is a special type of debt we’re talking about here. The key is to stick as close as possible to what advisers call ‘good debt’.
In the ‘good’ class: official government loans available via the Student Loans Company. Compared to the average credit card rate, which is just under 17 per cent according to the Bank of England, or a personal loan (nearer 10 per cent, but can be much higher) this is cheap borrowing.
Currently, the interest rate on official student loans is capped at the rate of inflation, as measured by the Retail Prices Index in March each year, which has averaged just under 3 per cent since the turn of the millennium. Essentially, the debt is designed so that it doesn’t grow in ‘real’ terms – the link makes sure it keeps pace with the rise in prices across the economy.
At the moment the rate is being held down at 1.5 per cent, as the Student Loan interest rate is not allowed to go more than 1 per cent above a basket of certain bank interest rates, which includes the Bank of England’s base rate, currently 0.5 per cent.
Student loan debt also doesn’t have to be paid back immediately; rather it is paid slowly and comes straight out of a graduate’s pay-packet. Interest-free overdrafts are also classed as ‘good’ debt, but need to be paid back more quickly (see the section on student current accounts for more).
Outside of these two are commercial loans and credit cards. These come with warnings, though, and are best reserved for certain types of purchase and emergencies only (see guide section ‘What to do if things go wrong’).
Students can borrow just over £8,000 a year via the Student Loans Company. Students in London can borrow more – around £10,000 a year – because living costs are higher. The exact amount received is means-tested and depends on their parents’ income, but all students qualify for at least 75 per cent of the maximum amount.
What about the new £9,000 a year fees?
Fear not. The Government’s new £9,000 a year fee cap will not kick in until NEXT year. Anybody already a student then won’t be affected (which is just as well, as future students could end up paying back up to £83,000 when the new system is introduced in England in 2012, according to BBC researcher Julia Ross.)
Your son or daughter will be classed as a 2011-2012 entrant if they start this September and so will be part of the last lucky cohort paying the much-more-like-it-but-still-very-expensive £3,375 a year fees.
So what are the fees?
Every university charges a slightly different yearly rate. The maximum they can charge, though, is £3,375 for the 2011/12 year. This will increase slightly every year a student is at university but will not suddenly hit £9,000. For students returning in autumn 2012 for their second year, fees will be capped at £3,465.
A quick warning about taking gap years: delay entry to September 2012 and students will get lumbered with that dreaded £9,000 a year fee.
What’s about living costs?
Fees are the most basic cost students have at university. On top of that, they need cash to cover accommodation and living costs, which vary greatly.
Typical accommodation costs anything between £60 and £100 a week, varying greatly depending on location. Then it’s day-to-day living, which includes books, travel, food, socialising etc. See our section on budgeting for the full breakdown of just how much a student needs.
The key to knocking this looming burden on the head is the Student Loans Company. Every student in the country is eligible to take out a government-sponsored loan to help get through the three, four (or more) years.
There are two types of student loan: one is called the Tuition Fee Loan (does what it says on the tin); the other is the Maintenance Loan.
These loans are probably the cheapest borrowing a student will ever see. That’s well worth taking advantage of, even if a student can just about afford to go without. Furthermore, your young student won’t need to start repaying the loan until he or she is earning at least £15,000 (see below for more).
Any free help?
As a bonus, there’s also some genuinely free cash available to supplement these core loans. This, again, comes direct from the government purse – the difference is, it doesn’t have to be paid back. If, as a family, your income is less than £50,000, you can apply for what’s called the Maintenance Grant. It’s designed to be further help with living costs for families who don’t boast chunky pay-packets.
The maximum you can claim is £2,906 for the 2011/12 academic year and it’s based on your income and savings. Families whose income is nearer £50,000 will get only a small portion of this maximum.
In addition, each university must, by law, offer an additional bursary to students eligible for the full Maintenance Grant from the government. The minimum they can offer is £338 for 2011/12, which doesn’t have to be repaid. But many offer much, much more and the average is nearer £900. This can take the form of cash or, occasionally discounts on accommodation or books.
How the loans work
Before getting carried away with free grant money, let’s take a look at the loans. They’ll cover the £3,375 a year fees (Tuition Fee loan) and a fair chunk of the rent for halls of residence or private accommodation (Maintenance Loan). To give you an idea, a rent bill of £80 a week is £4,160 over an entire year.
The Tuition Fee loan gets paid direct to the university or college. You don’t need to raise a finger once it’s up and running. The Maintenance Loan and Grant get paid into a student bank account. Unfortunately the deadline to apply for student finance help in 2011/2012 passed in May. Hopefully, you got in quickly enough, but if you didn’t and want to apply for next year, follow these steps:
First check whether you’re eligible. Visit the official Direct Gov page here. Then register with Student Finance England.
It’s a case of completing and returning an application form. Parents may be asked for evidence of identity or household income. Both they and their son or daughter has to sign a loan declaration to confirm they’re happy with the details. Students aged 25 or over are deemed independent. In certain instances, students under 25 also gain this status – if, for example, they are married or in a civil partnership, or have supported themselves for three or more years.
When does the money arrive?
Students receive their maintenance money in three installments each year, roughly at the beginning of each term. The tuition loan goes straight to the university.
Paying it back
A student loan doesn’t need repaying until a graduate earns more than £15,000. As the minimum standard, a graduate will pay 9 per cent on everything earned above this mark. It’s also possible to pay back more and clear the debt quickly – even as a single lump sum.
As an example: at the standard rate, someone earning £20,000 a year would pay back £37.50 a month. Someone earning £30,000 a year would pay £112.50 a month.
It can take anything up to twenty years or more to pay everything back (it depends on earnings above £15,000, of course).
Note that the total debt repaid will grow the longer it takes. Why? Well, while there is no commercial rate of interest, the remaining debt after payments does increase by the rate of inflation every year (as measured by the Retail Prices Index). This has averaged just under 3 per cent since the turn of the millennium but has started to edge higher since 2010.
Debt adviser Steve Rees says parents shouldn’t worry, though. He says: ‘Encourage your son or daughter to pay off the loan at the normal rate, don’t pay it off early. This is the cheapest money a student is ever going to get. You only pay when you’re earning more than £15,000.’
Bursaries or scholarships
Certain universities offer bursaries and scholarships to hard-up families and bright sparks. Every institution varies, and it’s a case of making contact with the university and finding out what’s available. You could be surprised by the amount of help on offer, which can be as much as £15,000 a year for a select handful of students. In 2006/07 around a quarter of all bursaries were available on the basis of academic performance rather than on financial background, the NUS says. Some bursaries are also offered based on certain personal circumstances (e.g the student is disabled, or from a local school).
Article By: Dan Hyde