Clearing: Demystifying student debt

How will student debt affect graduates?

Student debt will not have a significant impact on graduates. Even if a student owes £10,000 or £100,000, the monthly repayments are the same, although the higher the loan the longer it will take to pay off.

After 30 years all outstanding amounts are written off so many graduates will only ever repay a small proportion of what they borrowed. Some will repay it all, some will repay none, most will repay some.

Of the numerous historical repayment terms (from 1992 onwards), the current system (2012) offers the lowest monthly repayments. Many graduates will pay more for gym memberships and mobile phone contracts than they will on monthly student loan repayments.

Will it make them more willing to take on debt in the future?

Debt is an unavoidable fact of life for most people these days. But managed properly, debt can allow you to access things that you couldn’t otherwise afford to pay for upfront (i.e. mortgages, car loans etc).

Managing your student funding, accommodation costs, general living costs and an overdraft for three or four years of study offers a good grounding into future money management and debt awareness.

Having no experience of money management is a greater risk to future debt problems.

Does student debt make it harder to buy a first home? Or is it affordable, given the extra earning potential?

Student Loan ‘debt’ doesn’t show on your credit file so the amount you owe doesn’t directly impact on your ability to get a mortgage. Lenders will look at your ability to repay the mortgage during their assessment. The more you earn, the better your ability to afford repayments.

It often helps to think of your student loan ‘debt’ and repayments as a Graduate Tax. The more you earn, the more you will repay (similar to income tax).

Funding and tuition fees are an emotive issue and some students or their families might dismiss the idea of university out of hand as being too expensive or not worth the investment. What would you say to them?

We speak with a number of parents and families at Open Days and other events about the cost of Higher Education. Many parents still think that tuition fees have to be paid upfront or that they will be responsible for the payment in some way. Understanding that their children can access support for tuition fees and living costs, even for very high income families, takes away any immediate anxiety for the majority of people we speak to.

Having good, clear, factual information regarding repayments is also a powerful tool.

There are lots of figures banded around regarding the financial benefits of Higher Education and the additional income graduates can earn over a lifetime. I do think that most students and their families understand the benefits (not just financial). It’s often just the lack of good information that causes the most concern.