Handling Your Student Debt
If you are graduating from university soon, entering the ‘real world’ with a huge debt lingering over your head is naturally a daunting prospect. Once you understand your student debt and the rules in place to help you with repayment, student debt management should be relatively easy and stress-free. This guide will help you understand how your student debt differs from other debts, and how you should go about handling it.
In this guide:
How should you handle your student loan debt?
Student loan debt (the combination of your maintenance loan and tuition fee loan) is very different to ‘regular’ debt. There are a number of measures in place to help you with repayment.
The first is that you only begin to pay back your student loan when you earn over a certain amount each year. At the moment, this income threshold is £25,000. As many graduate jobs pay less than this, you may not have to worry about paying so much as a penny for a good while after leaving university.
How much you pay back is also entirely dependent on your salary. You only have to pay back 9% of whatever you earn over £25,000, so you do not need to fear random repayment increases. And, if your circumstances change and your salary drops back under the threshold, or you become unemployed, your repayments will stop. This means you can always be sure that you will be able to afford your repayments, since they are always linked to your income. It is often psychologically beneficial to think of your student debt as tax-like, in this regard.
It will also be a comfort to know that your debt will be wiped after 30 years. So, even if your income has not been high enough to pay back your debt in full, you can guarantee that it will be cleared in 30 years time, regardless of the interest you have accumulated. The Institute for Fiscal Studies (IFS) predicted that more than 70% of students will never pay their loan back in full. The only people who will have paid back everything after 30 years will be those who entered into a high-salaried job immediately after graduation, or those who did not require either a maintenance loan or a tuition fee loan in the first place.
While these perks have hopefully eased your mind a little, it is important for you to know that the government is able to retrospectively change student loan terms at any point, even if you signed your contract years ago. However, if anything major does change, you can be sure that it will be big news. As long as you keep up with current affairs, it is unlikely that the terms will alter without you knowing.
How should you handle student overdrafts?
Most student bank accounts offer interest-free overdrafts, allowing you to spend more than you have in your account for the duration of your time at university. If you have left university with a maxed-out overdraft (which can be up to £3,000, depending on your credit rating), this may be an additional source of stress, alongside your student loan debt.
When you graduate, your student account will be converted into a graduate account. Take reassurance in the fact that these accounts will normally offer an overdraft with 0% interest for 3 years, so you won’t start to accumulate interest the day after graduation!
The overdraft limit will usually decrease year by year to encourage you to pay it off. This may be daunting, but a little push might be just what you need in order to make paying off your overdraft a priority.
You should ensure that you know what your repayment conditions are when you accept the graduate account. Failing to pay it off in time will likely result in fees. Leading up to graduation you should read up on graduate accounts and shop around to find the best deal - there is nothing to stop you from switching banks if you want to!