What is debt anyway?

Whilst we all might feel like grown ups when we are 17 or 18 and applying for university, there is still a lot to learn. School gives you a good grounding on many topics, but the curriculum still fails to prepare students for various parts of the real world, and does not explain much of how finance works at all.

Unless you’re Scottish or come from very wealthy parents, in all likelihood you will need to take out a student loan to pay for your university studies unless you manage to find a scholarship. And as tuition fees have soared to more than £9,000 per year over the last decade, it is important to understand exactly what debt is and how it works.

Consumer debt tends to come in three forms – bank overdrafts, credit cards, and loans, and before reaching 18 it is unlikely that you will have really come across any of these options.

In reality, all three options work in a very similar way, in that you make an agreement with the bank or other financial institution that they will lend you a certain amount of money on the promise that you will pay it back over a set period of time with interest paid on top.

Overdrafts and credit cards tend to be more flexible forms of debt, as banks will offer you a set amount you can use as and when you need, but often with high interest rates, while loans tend to be more for one-off fixed amounts that you pay back regularly over time. If you are struggling to work out what it all means and which one you need, then make sure to find a qualified and knowledgeable person, that understands the difficulties and challenges you face.

Your student loan is slightly different to a loan from the bank, as your debt is with the Student Loans Company, and the payback requirements are very different. Most importantly, you do not start paying back your loan until you start earning over £21,000 per year, with repayments taken as 9% of your earnings above that figure. This protects those who are earning low wages from the burden of repaying the loan, so it can be confusing for some to understand – but it makes sense once you think about it!

Photograph by Howard Lake

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