How to look at student debt

Students in the UK today are often fearful that the government’s university fee plans are going to utterly prohibit them from looking at higher education. On the face of things, going in to higher education looks like it could land you in a whole load of financial issues. But this really isn’t the case. Prevalent advice from teachers and those who help students in to higher education is pretty simple. In a nutshell, it’s ‘don’t treat student debt like a debt, because in the real world it’s not a debt at all’. Frightening? Most students think so. Here is why it’s the truth.

Student debt is a necessary expense. It’s not a luxurious extravagance. When you start to budget for the basic necessities of the student lifestyle, you realize that you may need to make initial investments with borrowed funds– whether that means finding a bike for cheap transportation or a mono laser printer for cheap and efficient printing. If you want to go and study something, and you’re deeply passionate about your goal, then you should be able to. Student debt is one of those necessary things you incur by following your dream.

Here’s why student debt isn’t the same as real debt. Your student loan has a very specific set of circumstances under which it can and cannot be paid back. This means that, until you start earning above £21,000, you won’t have to pay anything. In this way, it’s more like a tax than a debt. Consider that you’ll earn more – both financially and intellectually speaking – for the rest of your life as a result of your degree, so a tax on this is fair to those who haven’t chosen that path.

Moreover, student loans don’t accrue interest like a regular loan. While you’re studying, the interest is accrued at the rate of inflation plus 3%. However, once you’re earning, things change. Below £21,000 you’ll gain interest at the rate of inflation, dead. Between £21,000 and £41,000 it’s a sliding scale up to that rate of inflation plus 3% figure. Beyond £41,000 a year the interest accrues at the regular inflation + 3% rate. To put that in to context, a graduate earning £25,000 a year (twenty-five percent higher than the average graduate salary, which is £20,964) will have a monthly repayment of £30. You pay 9% of your income above £21,000 a year, which makes it even more like a tax than a loan.

It’s not a real debt for other reasons, too. The main reason why people fear debt so much is 1) impact on credit rating and 2) the bailiffs come knocking at the door to take your stuff away because you’re behind on your payments. The first issue is negated in the student debt scenario: your credit rating cannot and will not be affected by student loan or maintenance loan borrowing. In the second case, SLC has no bailiffs. If you fail to pay off your student loan after a reasonable amount of time (25 years at the time of writing), your debt is utterly written off – it’s underwritten by the government, who will pick up the tab if you cannot. And remember that you only pay back your student loans when you’re earning above a particular threshold.

So, do not let a fear of debt put you off going to university. Many people have the time of their lives there, and it sets them up tremendously well for the rest of their lives. Not only do you learn a set of employable and important skills, you’ll become an expert in something you love, make lifelong friends, and discover things about yourself and others which, in knowing, will help you to become a happier and more rounded person.

How big an overdraft do you need with your student account? Find the best student account for you with our Student Bank Account Comparison Guide >>

Photograph byJames Cridland

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