Wealth Check: 'How will I live with all this debt?'

Joanne Walker, a 29-year-old taking a postgraduate course in journalism at Cardiff university is dreading the financial struggle she faces on graduation.

Like thousands of students, Joanne has a serious debt problem. Although she accepts responsibility for her predicament, she feels a little cheated by the system that made it so easy to get there in the first place.

"The banks positively bend over to help you out by increasing your overdraft limit, credit-card companies invite you to jump on their bandwagon and, perhaps most worryingly of all, the Government condones student loans which, for me and many others, represent the largest segment of debt," she says.

In June, Joanne hopes to get a job as a magazine journalist with an average starting salary of around £15,000. Her current spending at university is about £700 a month on living expenses including bills, going out and food. Since so many magazines are London-based it is likely that this is where she will start work, which concerns her as wages in the capital are not usually high enough to offset higher living expenses.

Joanne has taken out student loans of £3,000 a year amounting to £12,000. Since she has other debts to deal with, she will defer repayment of this sum, on which the interest rate is only 3.2 per cent, until she has started earning at least £24,137, at which threshold she must start repaying.

Joanne has no savings but is keen to get a mortgage as soon as she can. She would also like to start paying towards a pension.

We asked three independent financial advisers for help: Justin Modray of Bestinvest, Marcus Hodges at Savills Private Finance and Ashley Clark at Needanadaviser.com.

Case notes

Personal: Joanne is about to complete a postgraduate diploma at Cardiff University.

Income: £100 a week from her parents and grandparents (until completion of diploma).

Monthly outgoings: about £700 a month on general living expenses and travel.

Debt: £12,000 in student loans; £6,500 career development loan with Barclays Bank; £5,000 graduate loan and overdraft, also with Barclays.

Savings: none

DEBT

Justin Modray says that Joanne's priority has to be clearing her loans since the interest charged will compound the problem. This is not going to be easy when you consider that, earning £15,000 a year, she'll end up with around £1,000 a month after tax and National Insurance. This won't leave her much to live on after meeting debt repayments of £400 a month relating to a career development loan and overdrafts.

Joanne's biggest hope is self discipline, he says. The solution to paying off debts is to cut outgoings to the bone and use any surplus income to clear debts as quickly as possible.

Ashley Clark says assuming a starting salary of £15,000, Joanne's debts will be unmanageable. She should reduce interest costs as early as possible by shopping around for banks with low rates rather than settling for the one she started with, as so many students do.

Loan rates at Cahoot and Northern Rock are 5.8 per cent, compared with the 12.9 per cent she would pay were she to stick with Barclays. To make monthly payments more bearable he suggests taking out loans over five or 10 years, which would reduce payments to £125 or £72 respectively.

MORTGAGE

Marcus Hodges says Joanne will be in a far better position to take out a mortgage once she has cleared her debts. Not doing so would mean she wouldn't be able to borrow so much in the first place. Most lenders take outgoings as well as income into account when deciding on the amount you can borrow so this is crucial.

Once her debts are cleared, if she is earning £15,000, any mortgage within Joanne's grasp would be limited. Northern Rock's Together mortgage, which allows borrowers 4.8 times their income, would give her a mortgage of up to £72,000.

Some graduates seek the help of their parents, either with a deposit or asking them to be guarantors, says Hodges. If they are happy to help, he says, her parents would apply for a joint mortgage with her. But they must be prepared to step in if she were unable to pay.

PENSION

Modray says that Joanne's best bet is to start saving as much as is practical once her debts are cleared. A stakeholder pension would be a good starting point if her first employer does not have an occupational scheme for staff.

For a free financial check-up, write to Wealth Check, 'The Independent', 191 Marsh Wall, London E14 9RS, or e-mail cash@ independent.co.uk