EVEN in these strange times, going to university is a really exciting period in life. It is a massive financial challenge, though, with many new students having to get to grips with budgeting for the very first time.
For the parents of new students going away this week, as well as for the students themselves, the financial aspect of university life can be daunting and strange. On top of loans for tuition fees (alien to many parents), they must learn to understand the system of maintenance loans and overdrafts that keeps most students afloat during their time at university.
According to research from the Association of Investment Companies (AIC), most parents of new students underestimate the debts their children will graduate with. The average expectation was £24,000, when in fact the average student debt on graduation is nearly £40,000. The children themselves are more savvy, expecting to graduate with £38,000 of debt with nearly half assuming they won’t pay it off until they are past 50.
Extra financial strain due to coronavirus has put off many would-be students says AIC director Annabel Brodie-Smith. ‘It’s particularly worrying to see that a fifth of those not planning to attend university cite coronavirus as a reason, with the financial effects of the pandemic having an impact on students’ ambitions,’ she says.
However, with student finance available, managing money well is likely to mitigate the effects of the virus on student finances and ensure graduation without problem debts. Here’s how to get started.
Get to grips with how your loans work
The most important thing to understand when you are going to university is how the system of student loans works. Most students in England will apply for these loans, which pay separately for tuition fees and maintenance (day-to-day living costs). Many will never pay the full amount back. The system is different for students from Scotland, Wales and Northern Ireland, so you need to understand which system applies to you.
In England, your tuition fee loan is paid regardless of income, and goes directly to the university to pay their fees. Your maintenance loan is means-tested, which means that you can borrow more if your parents’ income is lower, and the amount you are paid also varies depending on whether you live at home or in halls, and whether you are based in or outside London.
Once you graduate, you become eligible to repay your loans in the April after you leave university. You don’t’ start to repay it until you earn more than £26,575 a year, and at this point you repay nine per cent of everything you earn above that threshold as a loan repayment. The threshold changes each year in line with average earnings.
This means that many people never end up repaying their student loan, as you stop paying either 30 years after the April when you graduated or when you die as well as once paid off.
The situation becomes complicated because the interest rate on student loans is relatively high, meaning that your debts increase over time. This prompts many people to pay the loans off early, which some financial experts believe is a mistake.
‘Only 17 per cent of students ever repay their loan in full,’ says Sarah Coles, personal finance analyst at Hargreaves Lansdown, adding that this means that making extra payments can be a waste of money ‘because these debts are going to be written off anyway’.
Instead, she says, students should focus on good money management in other areas to ensure that they graduate in good financial shape. ‘By focusing on official student loans, we can end up wasting money, and overlooking the real problem debts students pick up along the way,’ Sarah explains.
Use your bank account overdraft
Getting a good student bank account will help you to manage your money, Sarah says, because it will offer you a free overdraft which can prevent you racking up expensive debt elsewhere.
Nationwide, for example, offers one of the most generous packages, an interest-free overdraft of £1,000 in year one, £2,000 in year two, and £3,000 in year three. You will need to start paying off your overdraft after graduation, though, as it reduces steadily after this.
If you can limit your borrowing as a student to your loans and overdraft, you will be doing well. Other sources of debt are more expensive. Sarah, at Hargreaves Lansdown, warns that alternatives include expensive student credit cards.
‘Student credit cards usually charge a higher rate of interest than standard cards, because students haven’t yet built up a credit record and often have no earnings with which to ensure repayments,’ she explains. Private loans aimed at students can also be very expensive, so it is best to use your student overdraft if you can.
Talk to the Bank of Mum & Dad
The maintenance loan is means-tested, as explained above, which means that parents are expected to chip in if they can. In these straitened times this is difficult, and may be a tricky conversation to have, of course, but it is vital to be upfront about the real cost of university.
The most recent National Student Accommodation Survey found that parents contribute an average of £2,542 towards rent each year, while many also give extra loans to their children to help pay living costs.
If parental income has changed due to coronavirus, telling the Student Loan Company may result in a larger loan. Derek Ross, the Student Loan Company’s director of operations, say that if household income has dropped by more than 15 per cent, you can apply to have estimated income for the current tax year used to decide how much you can borrow. ‘Our contact centres are open daily and there is also lots of information available at studentfinance.campaign.gov.uk and on our social media channels to help students, and their parents and partners, to get prepared for payment this autumn,’ he says.
Use technology to manage your money
Budgeting is alien to many new students, but even making a simple list of what you are spending will help.
Tom Allingham, head of editorial at student finance website Save The Student, says you should make a list of all the money you know you’ll receive, and then list all the things you know you’ll have to spend it on, like rent, food and bills.
‘That way, you will know how much money you have left to spend on non-essentials, or how much you need to find from elsewhere,’ he explains.
Students can really benefit from using new technology such as that offered by app-based banks, which can help you to budget. Even if you choose to have your main student account with a bank like Nationwide, there’s nothing to stop you opening another bank account, too.
‘App-based banks like Starling and Monzo are great at helping you to create and track these budgets,’ says Tom at Save The Student. ‘We’d recommend having one in addition to your main student account, which you should keep for the zero per cent overdraft. Then transfer a set amount of money to your app account each week or month, and try to keep within that budget.’
Get help if it all goes wrong
Learning to manage your own money is hard, and student living is expensive. You certainly wouldn’t be alone if you ended up with expensive debt as a student. In many cases the debt repayments hit when you graduate, when repayments are suddenly needed.
Recent figures from Moneysupermarket show that more than a fifth (22 per cent) of students use payday loans, and a similar percentage use loans and credit cards.
Many graduate with money worries. The research found that nearly two thirds of recent graduates are worried about their finances, including one in five that consider themselves extremely worried.
Sasha Evans, personal finance expert at Moneysupermarket.com, said that steps like shopping around to get the best deal on a loan can really help, while you might be able to switch a credit card debt to a zero per cent rate if your credit rating is good enough.
‘If you’re really struggling with your debts, don’t hesitate to get in touch with your product providers. They’re required to take into account every individual’s personal circumstances and you might be able to negotiate a personalised repayment plan,’ she adds.
Remember that missing debt repayments can lead to you ruining your credit rating, making it harder to rent a property or get a mobile phone contract in future, so do prioritise these debts.
‘Costs were worrying’
AMELIA ENSTONE, 18, from south-east London, is going to Durham University to study Music this month.
‘The financial aspect of preparing for university has definitely been the most stressful, especially with the current global situation and the lack of jobs in industries that would usually be accessible to students,’ she says. ‘Trying to estimate the cost of essentials has been difficult, particularly with the impact of lockdown on food prices and the fact that I’m moving from London to the north-east, where prices won’t be the same as what I’m used to.’
Amelia has already turned to technology to help her out. ‘To keep track of my spending, I use the Halifax mobile banking app, and I recently started using Yolt to categorise my purchases and this has really streamlined my budgeting process. This is definitely the most useful tool I’m currently using to manage my money,’ she explains.
‘Otherwise, I do almost everything else on a massive Google Sheet, organised by term time then big expenses — like rent and JCR costs — and everyday expenses and income.
‘After results day, I switched my regular current account to the Halifax Student Current Account so I have the safety net of the no interest overdraft for emergencies and for general support in the few weeks before my student loan comes through. However, next year, when my 16-25 Railcard runs out, I will switch over to the Santander 1-2-3 Student Account so I can take full advantage of the free four-year Railcard. I’m hoping that I will slowly build my confidence with making regular everyday purchases, as the initial costs of moving to university are surprising and were initially slightly worrying. But this is just a hill I need to get over in a step towards being confident with my finances.’
‘He can’t wait for a bit of independence’
MUM Kelly Newton, who runs underwear company bp3underwear, is hoping she has passed on her financial acumen to her son Mackie (both pictured above), who is heading off to Exeter University this week.
‘He has been away at boarding school for four years and only had a very small allowance, and he managed that well enough so I feel confident he will cope. I will also be helping him out as and when I need to,’ she says. ‘I haven’t really talked to him about money and budgeting — he is pretty organised and sensible so I am leaving it to him.
‘He has worked out that he will need £40 for food and £20 for drink a week! He has said that he will look for a job in the New Year but just wants to settle in and enjoy the experience first.’
Mackie, from Croydon, has opened a NatWest bank account because of its offer of free Amazon Prime, but will also be using Monzo, because it is good for budgeting.
‘Financially, he feels prepared, he has his student loan and he worked during lockdown so he has some of that money left,’ Kelly says. ‘He’s ready to get to University, he cannot wait for a bit of independence.’