Getting to grips with a £32,220 student debt – and how you can lighten the load

After three years at university Vic Froggett has started in her first job and is adjusting to the succession of new bills she has to pay. But as well as the increased cost of rent, travel and council tax, in the background is her mountain of debt – student loans of £40,000.

After borrowing all she could from the Student Loans Company (SLC) for the £9,000-a-year tuition fees for her English literature and politics degree at the University of Reading, she also took out money for maintenance. Now working as a publishing assistant for £17,000 a year, the debt appears insurmountable.

“I won’t start repaying my student loan until I earn £21,000, and I’m not worried as it’ll be wiped anyway after 30 years,” she says. “I don’t think I’ll end up paying back the full amount.”

Her debt burden is typical. Student loan debt in the UK has soared to more than £100bn for the first time, according to latest figures from the SLC. The average after graduation is £32,220 in England and £11,740 in Scotland.

Moving from a student house to a flat in Reading with her boyfriend, Froggett’s accommodation costs will rise from £360 to £462. “I’ll have to pay council tax and travel on top – and fees for private renting are insane, with demands for six weeks’-worth of rent, and agency and referencing fees on top,” she says. “My course fees at Reading went up by £250 for new students this year, from £9,000 to £9,250,” she adds. “I loved university, but it’s only going to get more difficult to afford it.”

With universities set to increase their fees to more than £10,000 a year by 2020, the amount of debt graduates are saddled with is expected to grow. Here, we consider what they need to know to get a grip on their finances.

I don’t think I’ll end up paying back the full amount

What will graduates repay?

The majority of debt is with the SLC – the government-owned not-for-profit organisation. Repayments kick in the April after graduation, but only when graduates earn more than £21,000 a year. They pay 9% on any pre-tax earnings over this amount – so, the more earned, the more repaid.

On an annual salary of £25,000 a year that is £30 a month, and at £30,000 it’s £67 a month. These payments are automatically handled by employers, unless graduates are self employed. After 30 years the debt is wiped however much is paid off.

The SLC has been plagued with reports of administrative blunders, with some graduates reporting that errors have left them out of pocket, sometimes by thousands of pounds. Recent problems have included graduates continuing to make repayments after their loan is cleared, while others face demands from debt collectors with claims their account is in arrears.

What are the interest charges?

Student loan interest rates are linked to March’s retail price index inflation figure. Students pay interest on loans while at university. At present they are charged 4.6% – the March 2016 RPI figure of 1.6% plus 3%. However, from September this will rise to 6.1%, based on the March 2017 figure of 3.1% plus 3%. After graduation the interest charged depends on individual incomes. If a borrower earns £21,000 or less the rate is RPI – currently 3.1% – rising on a sliding scale up to RPI plus 3% if your income is £41,000 or more.

In Froggett’s case, in the first year after graduation the interest on her loan will be £1,240, based on 3.1% as she earns less than £21,000, says Andrew Hagger from financial website MoneyComms. “In year two, interest will be charged on the balance of £41,240, and so on. If she is still earning less than £21,000 in five years the balance will have risen to £46,595, based on current interest rates,” he says.

Should people repay early?

Many contemplating overpaying and cutting their debt are throwing money away

Martin Lewis

Graduates can make overpayments, or pay it all back at once, if they wish. However, wiping it out early is unlikely to be wise, according to Martin Lewis, founder of MoneySavingExpert.com.

“What is sitting in your student loan ‘debt’ account is what you borrow plus the interest – but for most that sum is irrelevant, as you only repay 9% of everything you earn above £21,000, for 30 years,” he says. “Around 77% of graduates won’t clear their debt within the 30 years, so the interest is pretty irrelevant. Many who are contemplating overpaying and cutting the debt are throwing money away, as it won’t change what you repay within the 30 years.”

Hagger says the system around which the repayments and balance are written off is bizarre. “It is only natural to be concerned about a large sum of money that you owe, and for someone to say ‘don’t worry about your debt and just concentrate on repaying the 9% on income above £21,000’ is difficult to accept,” he says. “Graduates will, understandably, still worry. However, whatever isn’t repaid after 30 years gets written off and doesn’t appear on your credit record, and nor will you be chased by debt collectors – so there’s no point in overpaying.”

Will it affect other borrowing?

Many graduates will look to begin saving for their first home after starting work. In principle, student loan debt shouldn’t impact on the ability to get a mortgage as these loans do not appear on credit reports, so they won’t affect the score when a lender is assessing suitability for a mortgage.

However, the debt may impact on affordability checks that lenders undertake to establish what repayments are possible. “Mortgage lenders now make a more individual assessment, rather than applying standard income multiples,” says David Hollingworth of broker London & Country. “This will take into account any ongoing monthly commitments. Those repaying a student loan could find that their repayments will reduce the maximum amount of borrowing on offer.”

What if I want to travel?

Any graduate who goes abroad to travel or work must inform the SLC and complete an overseas assessment form, or risk a fine. “They should provide details of their circumstances, any income and provide evidence of this – or current means of support,” says a spokesman for the SLC. “If they are assessed as eligible to repay, we will send a repayment schedule showing how much is due each month.”

Failure to inform the SLC of travel or working abroad may count as “non compliance” and see a penalty charge applied to your account. Fines were introduced in April 2016. Interest rates of RPI plus 3% may be applied if borrowers haven’t kept the SLC informed, which is typically reserved for the highest earners on graduation.

EVERY LITTLE HELPS

“Keep track of spending using any number of free apps,” says Damien Fahy from personal finance website MoneyToTheMasses. “This will help develop an awareness of what you are spending money on.” Set a monthly budget, and track main areas of spending.

Your CDs could be worth their weight …

Sell old stuff. Ziffit.com can be used to sell books, DVDs, CDs and Blu-rays by scanning a barcode and getting a price for each item, which are collected by a courier or dropped off at a local pick up point.

You can also use cashback sites. Quidco and Topcashback are simple to use and let you earn while making purchases. Search for the retailer you want to buy from and click through to its website to shop as normal. For example, at Quidco you can earn 6% at Currys PC World.

Among the main concerns for graduates, aside from student loan debt, is any overdraft on their bank account. Graduates are typically saddled with not more than £3,000, the maximum banks will lend. “Most give you a chance to gradually repay it, and help you with potential expenses in relation to starting your new job,” says Andrew Hagger from MoneyComms.co.uk.

Aim to repay this before the interest-free period expires.