Student Debt: Abandon All Hope?

23^rd January 2014

Michelle Highman, Chief Executive of The Money Charity, highlights the hidden costs of attending University

Much has been written over the last fifteen years, since University tuition fees were first introduced, about the rights and the wrongs of asking graduates to pay back society for their degrees. Whatever your views on the best way in which this should be done, most commentators and all political parties now agree that a free University education is consigned to the history books.

The current system, has its problems, but it does mean that no young person will be prohibited from getting a University education simply because they and their families can’t afford the tuition fees upfront. It’s clear, however, that in some quarters, that message still isn’t resonating. Student Finance is complicated – it’s not a standard loan nor a standard tax. It can be written off after 30 years, but can be sold as debt to a private company. And perhaps least well known by most young people and their parents, it attracts a commercial interest rate from the moment the loan is taken out (rather than upon graduation, as most presume). Meaning that an average student could easily borrow £45,000 pounds say, but will actual pay back £135,000 over nearly 29 years of their working lives. In our example the final payment will have risen to over £750 a month, before the debt is finally repaid.

The common response to this is that there is no need to worry, as you won’t pay anything back at all if you never earn over £21,000, but that doesn’t feel like a hugely positive life goal for a recent graduate to aspire to!

So on the assumption that we want our graduates to aim to earn over £21,000 and that many of them indeed will, this clearly is not something to be taken lightly. With rising graduate unemployment, and the differential between salaries paid to those who have degrees and those who don’t narrowing, there are those from all financial backgrounds, who are questioning the need for a degree at such a price.

Even repayments of £100 or £200 a month (so those on approximately £35,000 or £48,000 respectively) are a significant reduction from a young person’s take home pay. £100 a month less they can afford to pay on their rent, save towards a deposit for a flat or to protect their futures. And at that rate, the debt will never be paid pack, so it’s £100 pound a month they will pay for 30 years.

So, what can we do about all this? The short answer from many people, is probably not a lot. As set out at the beginning of this piece, the basic premise isn’t going to change any time soon and the country needs to continue to encourage its talent to graduate.

At The Money Charity however, we think there are a number of practical things we can do, which whilst they won’t solve the problem, may help. First and foremost, we need to ensure that all young people grow up having received a quality financial education. The inclusion of financial education on the curriculum from September 2014 is an important step forward but much more needs to be done to get the implementation right. The Money Charity delivers its Money Workshops in schools and colleges across England, Wales and Northern Ireland, and its on track to reach its target of 100,000 young people at some point this year.

Secondly we need to make sure, that as young people become students they have the information and advice they need to start to manage their money well and live independently for the first time. Managing your money sensibly whilst you’re a student may not eliminate your student debt, but it can minimise it. Each year, The Money Charity produces the Student MoneyManual – the free essential guide to Student Finance and managing money as a student. It’s a must read for anyone thinking about higher education, and is packed with money saving tips and ideas for all students.

But managing money for the first time is complex and the government needs to play its part too. So the third practical thing we can do for the next generation of students is to change the way student finance is paid. That is why The Money Charity proudly backs the campaign for monthly payments of student finance.

Paying students monthly rather than termly would help students manage their money more effectively whilst at university, help them learn to budget and perhaps most crucially would normalise monthly budgeting habits, mirroring the way we are paid once in work. This in turn would help them to develop valuable habits and behaviours to employ after they leave university and for the rest of their lives.

For most students, their first term’s payment is the biggest amount of money they’ve ever seen, so the temptation to spend unwisely is huge. Monthly payments would also reduce the risk of temptation, meaning students would be unable to blow the lot in the first weeks or month. Most adults would struggle if they were paid three month’s wages in one go, and asked to live on them for the next three months. So why do we ask our students to do just that? At The Money Charity we do everything we can to help students get to grips with good money management, it is time that the government does the same.