Controlling and getting rid of student debt

Most of the students nowadays fear debt (Education Guardian, 2006). However,
debt is not necessarily a bad thing, if you can control it. Learning how to
control it early on pays dividends for the rest of your life, as the
likelihood is, you will owe some money to someone until retirement, be it a
mortgage, loans or even leveraging a business. Simple corporate finance rule
of thumb states that individuals and businesses can benefit from a correct
ratio of debt in their portfolio (Brealey et al., 2003, p.
532).

The first rule of controlling your debt is not to spend too much. Students
have a lot of different discounts available to them, so you need to get a
student card as soon as you join the academic institution to be eligible for
the discounts. In turn this means that your purchasing power increases as
you buy the same basket of goods for less. For example, your Debt Reduction
Team offers a wide range of discounts that are available not only to you but
also to your friends and family (SDRT, 2002).

New students usually borrow from the Student Loan Company
(SLC) to fund their fees. This company will allow you to borrow up to £3,000
per year and the debt will need to be paid back once your income is £15,000
or more per annum (City University, 2006). The SLC's interest on the loan
only increases in line with inflation (retail price index), therefore you
will only pay what you have borrowed, plus inflation. The repayments will be
linked to your income at 9% (DFES, 2006, p. 8). SLC loans are primarily used
to pay tuition fees, but of course, you will also need some spending money.
The majority of students will open a credit-card account. However, what you
need to be aware of is that a credit card's interest is a lot higher then
those charged for a loan. Therefore, there are other sources of finance that
you can try first, such as Student Accounts that are provided by most of the
high-street banks. Student accounts will allow you to borrow at 0% interest
(up to a certain amount) during your university years and 1-3 years
afterwards. Most of the high-street banks compete to get students as their
customers, so make sure you check all of the available offers before
settling for an account.

However, if alternative resources have run out then opening a credit card
might be the only option left. In this case you should be looking for a
credit card with 0% on purchases. Most of the credit cards will have a
shorter time-frame on 0% purchases than on balance transfers, so you need to
find a credit card that will give the maximum time on free purchases. Zero
per cent on purchases means that the cardholder pays no interest on anything
that they purchase with the credit card for a certain period of time and
after that timeframe expires, a standard rate of interest is incurred on the
balance (RBS, 2006). The best deals on credit cards can be found on the
internet. There are two things that you can do once you reach the end of the
0% period:

a) transfer the debt to a new credit card provider; or
b) pay off the debt.

Otherwise the debt will start rising out of control. In the first scenario
there are a few things to watch out for.
First of all, when you transfer the balance the amount of 0% purchases will
go down. For example, if a new credit card offers a £2,500 limit and £2,000
is transferred from the original credit card, then only £500 is left for
purchases. Secondly, there will be a fee for transferral, which ranges from
2% to 6%, which needs to be taken into consideration when choosing the best
deal. Thirdly, if the credit card offers a £2,500 limit and £2,500 is
transferred, there will be no money left to spend, which will force you to
open another credit card. Furthermore, most of the credit cards will have a
certain cash withdrawal limit, which is much lower then the credit limit
offered. You should be aware of that limit, and bear in mind that you will
incur credit card charges every time money is withdrawn. So, the best thing
to do is to have a plan of how to pay some of the spending off whilst 0% on
transfers and purchases is still available.

Considering that you have some money coming in and 0% on purchases is
available to you, you can put this income into a savings account (cash ISAs
is one of the best ways of saving, while still allowing you to withdraw at
any time).
Therefore, your income is earning you money, but the credit card is not
charging interest. Once the credit card has to be paid off, the required
amount is withdrawn from the savings account and the credit-card bill is
nullified.

However, what can you do when there is no income coming in?
Unfortunately, you will need to rely on debt. As has been explained
previously, you will need to make sure that you transfer credit balances
before interest payments are incurred. However, there will come a time when
you will run out of money available to you and this will require you to have
some income coming in. As stated before, there are a lot of different ways
of earning income whilst at university. Furthermore, bear in mind that most
future employers will look favourably on previous job experience, even if it
is not related to the job that you are applying for.

Getting rid of debt on completion of university is also not as difficult as
it's made out to be, if you can apply the correct discipline. The first
thing that needs to be done is to understand exactly how much money is owed
(this can include credit cards, loans and store cards). Secondly, debts need
to be put in order of priority. For example, if the credit cards are
incurring 14% interest, whilst 4% is charged on your loan, then paying off
the credit cards should take priority. If you do not have the income to pay
off all of the credit cards straight away there are a number of things that
can be done:

a) transferring the balance to a 0% credit card; b) speaking to your bank
and asking them for terms to consolidate your credit cards (more then one
quote should be obtained) c) calling other debt consolidation companies and
seeing what they can offer (Clear Start, 2006).

Similar stages can be applied to other debts, in order of priority. If
steady income is available (which is higher than the amount spent per month)
then debt is not necessarily a bad thing. If spending is controlled, then
you can pay off outstanding debt, and benefit from alternative debt
available. For example, if you spend against your credit card at 0% per
year, then your outgoings can be put against the credit card, but income can
be put into a savings account allowing those savings to be used to pay the
card off at the end of the free period, so retaining the interest.

Some students think that they can default on a student loan. Defaulting on a
student loan is very difficult. The loan will be automatically written off
by the government after 25 years, if not paid (DFES, 2006).

Although the above work outlines different ways of maintaining and
controlling debts, it should be noted that bad debts and an inability to pay
may be registered with credit reference agencies, which in turn will
decrease your ability to obtain a mortgage in the future (Dwelley, 2006).
Therefore, it is important to control your finances at all
stages: during university and afterwards.

References

Brealey R, Myers S. 2003 "Principles of corporate finance"
International Edition, published by McGraw-Hill Higher Education, p. 532

City University, 2006, "Student Loans – new students 2006/2007" Available
from:
http://www.city.ac.uk/studentfunds/undergraduate/new/loans.h
tml (Accessed on 31/10/06)

Clear Start 2006 "Unable to keep up monthly payments on credit cards and
loans" Available from:
http://www.clearstart.org/credit-card-debts-uk.php?gclid=CPm
QwpvJo4gCFRnpXgoduHknSQ (Accessed on 31/10/06)

DFES, 2006 "Student loans and the question of debt"
Available from:
http://www.dfes.gov.uk/hegateway/uploads/Debt%20-%20FINAL.pd
f (Accessed on 31/10/06)

Dwelley S. 2006 "Student debt and how to deal with it"
Available from:
http://graduate.monster.co.uk/8663_en-GB_p1.asp (Accessed on 31/10/06)

Education Guardian. 2006 "Market logic turns a degree into a share
certificate" Available from:
http://education.guardian.co.uk/students/tuitionfees/story/0
,,1840824,00.html (Accessed on 31/10/06)

NatWest 2006 "Avoiding the student debt trap" Available
from: http://www.he.courses-careers.com/debt.htm (Accessed on 31/10/06)

RBS, 2006 "Credit Cards" Personal Finances Available from:
http://www.rbs.co.uk/Personal_Finances/Credit_Cards/Card_Fea
tures_and_Benefits/default.htm (Accessed on 31/10/06)

SDRT 2006 "Student Debt Reduction Team" Available from:
http://www.wessexscene.co.uk/article.php?sid=273 (Accessed on 31/10/06)

Copyright © 2006 Verena Veneeva

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