Graduating in debt management

The level of borrowing among students is soaring. Richard Thomson suggests ways of easing the pain

Being a student these days ain't the carefree experience it was always supposed to be. There was a time when you got a grant to pay for some of your living expenses at university while the rest was (theoretically, at least) made up by your parents. The result was that you emerged from higher education stony-broke but at least with minimal debts to your name.

No longer. Increasingly, students are having to turn to loans and overdrafts to finance them through university as the level of grants is steadily whittled down. A student emerging with a degree this summer is likely to be burdened with debts that feel almost as big as those of a minor third world country.

He or she will then probably have months of unemployment to look forward to, during which the debts will rise still further. And when you don't have any income to pay them off, a debt of almost any size can look pretty terrifying.

Research published by Barclays Bank this week shows that average student indebtedness at graduation has risen from pounds 1,470 in 1982 to pounds 2,207 this year. This year's figure is 14 per cent up on last, which suggests that the swing of student funding towards debts is taking place extremely fast.

That is bad enough, but the months after graduation are likely to create at least as big a headache. Last year, graduates found that in the first six months after university their debts soared by 22 per cent. If this trend continues, says Barclays, graduates this year are likely to find themselves with debts of pounds 2,797 by Christmas.

If you were Mexico, of course, you could simply refuse to repay and your bank wouldn't be able to touch you. Unfortunately, refusal to pay off your pounds 2,000 overdraft is not going bring Barclays or NatWest to their knees, so you are under an obligation to find other solutions for your debt. You will, in short, have to reschedule.

The banks are keen to help and seem to be making genuine efforts to understand the plight of indebted students. "Students should be studying, not worrying about money," says Ellie Wallace at NatWest. "The trouble is that some people don't worry about pounds 2,000 debt while others may be neurotic about a debt of pounds 200. It may not seem much, but to them it's big. We have to understand how they see it."

First crucial advice, then, is on no account tamper with your student loan if you have one. The rates of interest are nominal at around one to two per cent and the loan doesn't have to be repaid until your income rises to about pounds 14,000.

There is nowhere else you can get such favourable borrowing terms so don't, for example, go and pay it off with a much more expensive bank loan.

Barclays reckons that about 65 per cent of students' loans this year came from the student loan scheme. However, around 17 per cent came from bank lending of one kind or another (down from 22 per cent last year). Most of this is likely to be under student banking terms and usually includes a free overdraft.

Recognising the difficulties of finding a job staight out of college, the banks may offer to extend these student banking terms for a few months or offer you more expensive but still advantageous loan terms.

"Being unemployed after graduation is not a nice situation to be in," says Ms Wallace. "It can be very hard." So NatWest will extend the free student overdraft terms for six months to lighten the burden.

Once the student has found a job, NatWest offers a Post-College Loan at 9 per cent (compared with around 17 per cent for a normal personal loan) with fixed monthly repayments over one to five years, depending on the customer's income. It makes sense to convert all overdraft and credit card borrowings into this kind of loan, and you can even borrow more under the same terms for necessary expenses such as work clothes.

Barclays has a slightly different package for its Graduate loan. The student gets handed over to a special "graduate officer" trained to understand his or her problems and the free overdraft deal is allowed to continue for 12 months. Thereafter the debts are converted into a loan at 2.5 per cent over base rates (giving an annual percentage rate currently of around 9 per cent). There is a three-month grace period of no repayments, and then the loan is paid off over three years.

That is fine as long as you find employment. If you do not, however, the banks are still willing to be flexible since it is not in their interests to get you hopelessly into debt. They may, for instance, allow your student banking terms to run on even longer than a year.

The key to this, however, is to tell your bank manager what your situation is and convince him or her that you really are looking for a job. As long as bank managers have confidence in you, they'll probably be pretty co- operative. "If you strive, you'll get there," says Ms Wallace reassuringly, if a little sternly.

But what if you get hopelessly into debt while you are still at university? The options in this case are sadly limited.

You can apply for hardship grants or loans from your university, but most banks are unlikely to be very sympathetic. "We see little point in giving them an extra pounds 1,000 in loans since it won't help them in the long term," says one.

They are also loath to use parents as a backstop - most banks will not even inform parents of their offspring's indebtedness without the express permission of their student customers.

The Barclays research suggests that less than 10 per cent of the average student's debts are owed to his or her parents.

Banks express the pious hope that students will learn to be thrifty early on in their university careers. Barclays even has 170 Student Business Officers to help them stick to the straight and narrow.

However, if you go mad with a credit card in your first week, it is going to be very difficult to find anyone willing to help you out.

AVOIDING THE PITFALLS

If you find yourself under mounting debt

Do:

Try and convert all overdraft and credit card borrowings into loans with student banking terms attached. These usually include a free overdraft and can often be extended after the end of your course while you are looking for work.

Apply for hardship grants or loans from your university.

Keep your bank manager abreast of your situation. If bank managers have confidence in you, they are more likely to be co-operative.

Don't:

Tamper with your student loan if you have one. The rates of interest are nominal at around one to two per cent and the loan doesn't have to be repaid until your income rises to about pounds 14,000.