Financial wellbeing: managing and understanding debt

Student loan debt

Student loan debt (from the UK Student Loan Company) isn’t like other forms of borrowing you may encounter. Unlike a credit card or personal loan, your student loan isn’t paid back in fixed monthly instalments based on the amount you borrowed. Instead the amount you repay is linked to how much you earn. For most people, the repayments are taken automatically from your pay just like income tax, and the amount you repay is set at an affordable level, so you won’t feel the pinch.

Repayments on undergraduate loans from Student Finance England are currently at 9% of earnings over a threshold of £26,575 (that figure varies across the four UK regions, so check the threshold that applies to you). It’s also important to remember that with these loans any remaining balance is wiped after 30 years from when you became eligible to start repaying, regardless of how much or how little has been repaid up to then. Your student loan is also cancelled if you become ‘permanently unfit to work’.

The interest on these loans gets a lot of media attention, and many students feel quite anxious about graduating with what seems like a high level of debt. So it’s worth taking some time to understand how the repayments system works, and consider whether the total amount you owe will ever have a financial impact on you. Some research back in 2018 calculated that 83% of students won’t fully repay their loans, so for many students, the total amount outstanding has no effect at all on their repayments. This means your repayments on these loans operate more like a graduate tax than a loan repayment.

Credit cards and overdrafts

Credit cards can be a useful way of covering your everyday living costs, particularly when you’re waiting for your next student loan instalment to come in. But if at all possible, it’s recommended that credit card balances are cleared in full (not just the minimum payment) each month, otherwise the interest payable on your balance will really start to build up. Check the terms carefully and be on the lookout for any hidden fees. In particular, it’s usually very expensive to withdraw cash from an ATM off a credit card, so avoid doing that if you can.

One of the perks of having a student bank account with a high street bank are the 0% overdrafts. While student overdrafts can be a useful safety net for larger unplanned costs that may arise, it’s really important that you don’t go over your overdraft limit. This could result in hefty interest payments and charges. It can be tempting to think of overdrafts as free money, but remember this money is borrowed from the bank and will eventually need to be repaid. So make sure you think about how you will repay this once you have graduated.

Watch your spending

While you might have saved money during lockdown - spending less on transport and going out, you may have racked up some other costs quicker than you realised – for example on entertainment subscriptions and food deliveries.

With the relaxation of some of the Covid restrictions on the horizon, the temptation for a post-lockdown splurge is high. So it’s important to have a clear idea of how much money you have and how long it needs to last, to ensure you’re not spending at an unaffordable level. Also be careful of the risks of contactless payments. The current limit is £45, but an increase to £100 may come in later in the year. So it’ll be even easier to spend serious amounts of money with just a tap of your card. Make sure those quick purchases don’t lead to financial difficulty later on.

In addition to creating and using a budget, a good habit to get into is to ask yourself three questions each time you’re about to pull out your bank card or click ‘Buy’ – Do I need it? Can I afford it? Have I checked if it’s cheaper elsewhere? – If the answer to any of those is no, then don’t buy it!

Deleting any saved card details from your online retailers is another good way to encourage you to spend less. The time and effort required to input your card details for every online purchase could reduce the likelihood of following through on unnecessary impulse purchases.

If you need support with budgeting and money management then contact the Student Funding Advice team through askUCL to book an appointment with an advisor. 

Kyle Yearwood, Student Funding Advisor