Staying afloat

The Government recently made a confusing announcement about 'repayment holidays'. The terms of the parliamentary statement by John Denham, new Secretary of State for Innovation, suggested the option of taking a five-year break in repayments to the Student Loans Company would be open to all graduates. However, the Department for Innovation has now told Prospects that existing graduates must carry on repaying as usual. The rest of this page is devoted to our financial guide, first published with Graduate 29 and now slightly updated.

The debts

Graduates’ debts can be usefully divided into two: official student loans and the rest. So what can or should be done about them?

The Student Loans Company and its offshoots have relatively low interest rates and a fairly efficient way of collecting the money automatically if you’re on the post-1998 PAYE system. On the April after graduation those who are earning more than £15,000 automatically start repaying on a sliding scale according to income. Still, the money outstanding may continue to grow as interest is added even if the graduate is earning well above the £15,000 threshold. Anyone who has money available may be tempted to make extra repayments rather than face decades of debt. However, other debts should have priority, and even when all the rest have been paid off, it will probably be more useful to put any available money into an interest-bearing savings account rather than giving more to the Student Loans Company. If you suddenly find you need money for any reason, you don’t want to be forced into taking out an expensive loan because you have no money in the bank.

Overdrafts: Banks continue to charge no interest for a while, and the debt can even be increased through a no-interest ‘graduate overdraft’, perhaps to as much as £2,000 for something vital such as a deposit on a rented flat. But the debt must reduce in stages to nothing within two or maybe three years, so action has to be taken. HSBC recently withdrew its free graduate overdraft - its supposedly 'interest free' overdraft is now only available to graduates who pay a fee of £9.95 a month. However, there is nothing to stop its gradaute customers switching their overdraft to other banks which remain free. Remember that going above overdraft limits usually attracts heavy interest rates and charges.

Credit and store card debts: Paying off cards should have high priority because of their very high interest rates. Cutting up the cards with debt on them is the first necessary step so that you don't go further into the red on them. Other short-term tactics include moving card debts to a 0% introductory offer on another card or to a no-interest overdraft. If you are moving to a 0% card deal, make sure there is no fee for making transfers. For day-to-day use, a separate card free of debt is best – it should be paid up each month.

Graduate and personal loans: It’s not as good as clearing debts completely, but sometimes graduates with a steady job move their most expensive borrowings into a ‘graduate loan’ offered by financial institutions. Interest rates vary but can be substantial so it is essential to shop around - the best are now pushing up towards 8%. Fixed repayments must be made each month alongside the interest payment, so the combined total can gobble up a salary. It is worth noting that Northern Rock’s personal loan offering at present undercuts all graduate loans, although most other personal loans are expensive. Before taking the serious step of taking out a loan, read the small print until it hurts. Maximum loan amount, repayment holidays and repayment terms are among the variables. Never ‘consolidate’ debts with lower interest rates, such as borrowings from the Student Loans Company, on to a graduate loan.

A plan

Whatever financial finesse is used to move the debts around, money will still have to be found to pay them off (leaving aside Students Loans Company-type debts) sooner or later. But having a wage coming in may not be enough without a monthly plan to use it effectively.

Under the planned approach, expenditure needs to be closely watched and recorded, and a realistic budget drawn up and kept to. Somehow or other the monthly plan needs to include making repayments while leaving enough to pay any rent and get through to the next pay cheque without again going into the red.

Operating a couple of separate bank accounts can be an effective way of keeping track of income and expenditure (as devised by graduate Anna Harrison).

Bank account one receives the salary direct debit and feeds direct debits going out to deal with debts and bills. These should be set at amounts that still leave some money for day-to-day spending.

This allocation for daily needs is transferred into a second account. This means that you can't accidentally make cash withdrawals that will eat into the money earmarked for the direct debits.

A third account is necessary if there is an arranged overdraft. Otherwise the overdraft would swallow up the monthly salary.

In case of crisis

The time to press the panic button comes when the graduate debtor is in danger of defaulting. Fortunately there are a number of organisations ready and willing to offer advice.

National Debtline and Consumer Credit Counselling Service are the experts in drawing up plans to manage debt including advising on how to make proposals to creditors to reschedule repayments so that they become manageable. The local Citizens Advice Bureau provides debt counselling within a wider context.

The priority debts to deal with are the ones that could lead to you being thrown out on the streets. For instance, failure to pay Council Tax could even end in jail while a breakdown in relations with utility companies could lead to fuel cut-off.

Any defaulting on debts is bad news because it will find its way into the files of credit reference agencies which can affect attempts to borrow money or obtain a credit card in the future, perhaps leading to outright refusal or punitive interest rates. Graham Trickey

See also:

Student loan horror stories

Student Loans Company

(This article was updated July 2007)