How to handle student debt

The cost of a university education has soared in recent years, due to the combined effects of rising tuition fees and hefty interest rates on student loans. Borrow the full amount each year for a three-year course and you’ll owe £50,000 when you graduate – with almost £6,000 of that being interest charges.

However, before you start panicking about how you’ll repay the debt – or consider repaying it for your children – you need to know that a student loan isn’t like any other debt you’ll come across in your lifetime. You will only start repaying the debt once you earn more than £21,000 a year. Thereafter, 9% of your earnings will be taken to pay your debt, regardless of how much you earn. After 30 years, whatever you still owe will be cancelled.

Just over three-quarters of students will never earn enough to repay their loans fully, according to research by the Institute for Fiscal Studies. In most cases that means there is little point in overpaying your debt, as you’ll be repaying something that you may well never have had to pay back. A graduate earning £36,000 a year will repay £40,500 of a £55,000 total student loan over 30 years, says Martin Lewis in The Guardian, with the rest of the debt cancelled. If that student cut their debt with a £10,000 overpayment, they will still repay the same amount over 30 years, making the overpayment pointless.

However, a graduate with a starting salary of £40,000 and a 2% above-inflation pay rise each year would repay their entire debt within 30 years. This graduate could dramatically cut the amount of interest they pay by making an early overpayment.

The key is to wait for a few years after graduation; if you are then settled in a high-paying job, consider overpaying. But if your earnings haven’t yet broken through £40,000, overpaying is unlikely to be worth it. For parents who are eager to help their children out financially, “saving towards a housing deposit is arguably a much better use of your cash”, says Claer Barrett in the Financial Times. And for those about to start university, see the column on the right for some of the better student accounts.

The best bank accounts for your cash

Choosing the right student bank account can significantly improve your financial position, as you could avoid hefty overdraft charges, or earn some interest on that student loan.

Best for overdrafts

“Most students will spend a good portion of their university days overdrawn, so finding an account with a good interest-free option is important,” says Charlotte Nelson of Moneyfacts in ThisIsMoney.co.uk. HSBC and Halifax both offer student accounts with a £3,000 interest-free overdraft from the first year.

Best for freebies

If you are going to a university that is a long way from home, Santander’s student account comes with a free 16-25 Railcard that gives you a third off travel for four years. The account also offers an interest-free overdraft of up to £1,500 in the first three years, then £2,000 for years four and five. Students who are more likely to travel by coach may want to take a look at NatWest’s student account. It gives you a free National Express Coachcard, which cuts a third off fares for four years.
It also offers an interest-free overdraft of up to £2,000.

Best for interest

If you are one of the lucky few students who doesn’t need an overdraft, then there are a couple of student bank accounts that offer a tempting interest rate on balances. For small balances, TSB is the best option; it pays 5% on balances up to £500. If you do need an overdraft, it gives you a gradually increasing interest-free overdraft of up to £1,500. Alternatively, Santander’s 123 student account offers up to 3%, plus the Railcard and an interest-free overdraft of up to £2,000.

In the news this week…

• While the government “considers capping deposit schemes and scrapping letting agency fees”, there are already quite a few tenant-friendly schemes around, says Marc Shoffman in The Times. Some agencies and landlords offer zero-deposit schemes that “act as a form of insurance or warranty”.

These schemes, which include Dlighted, Insure Street, Let Alliance and Flatfair, tend to work slightly differently, but all avoid the need for “dead money” – a deposit that sits around being “eaten by inflation”. With Dlighted, there is no initial charge to the tenant, but they are liable for the cost of a successful claim if the landlord decides to make one at the end of the tenancy. Flatfair acts more like a warranty; tenants pay the equivalent of one week’s rent and landlords are then covered for 12 weeks’ rent. “Regular tenants can earn discounts for good behaviour,” and Flatfair “has its own insurance for debt collection and contract disputes” if the tenant refuses to pay.

• From November, Britain’s largest current-account provider will start charging a daily fee for overdrafts, says Ali Hussain in The Sunday Times. Around 20 million customers of Lloyds Banking Group, which also includes Halifax and Bank of Scotland (BoS), will see their interest-free “buffer” fall from £50 to £6.99, and will be charged 1p a day for every £7 they are overdrawn. This “may sound small”, but it is equivalent to a “whopping 68.4% if converted into an equivalent annual rate”.

Lloyds and BoS customers currently pay 19.89%. Only those with a student account or those who pay a monthly fee will “continue to enjoy” a larger buffer. If you do often find yourself straying into the red, you may be better off with an account such as First Direct’s 1st account, which doesn’t charge for an overdraft of up to £250 and charges a “relatively low” 15.9% thereafter.

• If you’re self-employed, don’t forget the 31 July tax deadline for your interim tax payment, says Alistair Bambridge on ThisisMoney.co.uk. The date “seldom makes headlines”, but miss it and you can expect to be hit with interest charges and, potentially, fines.