Most of the students nowadays fear debt (Education Guardian, 2006). However,
debt is not necessarily a bad thing, if you can control it. Learning how to
control it early on pays dividends for the rest of your life, as the likelihood
is, you will owe some money to someone until retirement, be it a mortgage, loans
or even leveraging a business. Simple corporate finance rule of thumb states
that individuals and businesses can benefit from a correct ratio of debt in
their portfolio (Brealey et al., 2003, p. 532).
The first rule of
controlling your debt is not to spend too much. Students have a lot of different
discounts available to them, so you need to get a student card as soon as you
join the academic institution to be eligible for the discounts. In turn this
means that your purchasing power increases as you buy the same basket of goods
for less. For example, your Debt Reduction Team offers a wide range of discounts
that are available not only to you but also to your friends and family (SDRT,
2002).
New students usually borrow from the Student Loan Company (SLC) to
fund their fees. This company will allow you to borrow up to ?,000 per year and
the debt will need to be paid back once your income is ?5,000 or more per annum
(City University, 2006). The SLC's interest on the loan only increases in line
with inflation (retail price index), therefore you will only pay what you have
borrowed, plus inflation. The repayments will be linked to your income at 9%
(DFES, 2006, p. 8). SLC loans are primarily used to pay tuition fees, but of
course, you will also need some spending money. The majority of students will
open a credit-card account. However, what you need to be aware of is that a
credit card's interest is a lot higher then those charged for a loan. Therefore,
there are other sources of finance that you can try first, such as Student
Accounts that are provided by most of the high-street banks. Student accounts
will allow you to borrow at 0% interest (up to a certain amount) during your
university years and 1-3 years afterwards. Most of the high-street banks compete
to get students as their customers, so make sure you check all of the available
offers before settling for an account.
However, if alternative resources
have run out then opening a credit card might be the only option left. In this
case you should be looking for a credit card with 0% on purchases. Most of the
credit cards will have a shorter time-frame on 0% purchases than on balance
transfers, so you need to find a credit card that will give the maximum time on
free purchases. Zero per cent on purchases means that the cardholder pays no
interest on anything that they purchase with the credit card for a certain
period of time and after that timeframe expires, a standard rate of interest is
incurred on the balance (RBS, 2006). The best deals on credit cards can be found
on the internet. There are two things that you can do once you reach the end of
the 0% period:
a) transfer the debt to a new credit card provider; or
b) pay off the debt.
Otherwise the debt will start rising out of
control. In the first scenario there are a few things to watch out for. First of
all, when you transfer the balance the amount of 0% purchases will go down. For
example, if a new credit card offers a ?,500 limit and ?,000 is transferred from
the original credit card, then only ?00 is left for purchases. Secondly, there
will be a fee for transferral, which ranges from 2% to 6%, which needs to be
taken into consideration when choosing the best deal. Thirdly, if the credit
card offers a ?,500 limit and ?,500 is transferred, there will be no money left
to spend, which will force you to open another credit card. Furthermore, most of
the credit cards will have a certain cash withdrawal limit, which is much lower
then the credit limit offered. You should be aware of that limit, and bear in
mind that you will incur credit card charges every time money is withdrawn. So,
the best thing to do is to have a plan of how to pay some of the spending off
whilst 0% on transfers and purchases is still available.
Considering that
you have some money coming in and 0% on purchases is available to you, you can
put this income into a savings account (cash ISAs is one of the best ways of
saving, while still allowing you to withdraw at any time). Therefore, your
income is earning you money, but the credit card is not charging interest. Once
the credit card has to be paid off, the required amount is withdrawn from the
savings account and the credit-card bill is nullified.
However, what can
you do when there is no income coming in? Unfortunately, you will need to rely
on debt. As has been explained previously, you will need to make sure that you
transfer credit balances before interest payments are incurred. However, there
will come a time when you will run out of money available to you and this will
require you to have some income coming in. As stated before, there are a lot of
different ways of earning income whilst at university. Furthermore, bear in mind
that most future employers will look favourably on previous job experience, even
if it is not related to the job that you are applying for.
Getting rid of
debt on completion of university is also not as difficult as it's made out to
be, if you can apply the correct discipline. The first thing that needs to be
done is to understand exactly how much money is owed (this can include credit
cards, loans and store cards). Secondly, debts need to be put in order of
priority. For example, if the credit cards are incurring 14% interest, whilst 4%
is charged on your loan, then paying off the credit cards should take priority.
If you do not have the income to pay off all of the credit cards straight away
there are a number of things that can be done:
a) transferring the
balance to a 0% credit card; b) speaking to your bank and asking them for terms
to consolidate your credit cards (more then one quote should be obtained) c)
calling other debt consolidation companies and seeing what they can offer (Clear
Start, 2006).
Similar stages can be applied to other debts, in order of
priority. If steady income is available (which is higher than the amount spent
per month) then debt is not necessarily a bad thing. If spending is controlled,
then you can pay off outstanding debt, and benefit from alternative debt
available. For example, if you spend against your credit card at 0% per year,
then your outgoings can be put against the credit card, but income can be put
into a savings account allowing those savings to be used to pay the card off at
the end of the free period, so retaining the interest.
Some students
think that they can default on a student loan. Defaulting on a student loan is
very difficult. The loan will be automatically written off by the government
after 25 years, if not paid (DFES, 2006).
Although the above work
outlines different ways of maintaining and controlling debts, it should be noted
that bad debts and an inability to pay may be registered with credit reference
agencies, which in turn will decrease your ability to obtain a mortgage in the
future (Dwelley, 2006). Therefore, it is important to control your finances at
all stages: during university and afterwards.
References
Brealey
R, Myers S. 2003 "Principles of corporate finance" International Edition,
published by McGraw-Hill Higher Education, p. 532
City University, 2006,
"Student Loans ?new students 2006/2007" Available from:
http://www.city.ac.uk/studentfunds/undergraduate/new/loans.html (Accessed on
31/10/06)
Clear Start 2006 "Unable to keep up monthly payments on credit
cards and loans" Available from:
http://www.clearstart.org/credit-card-debts-uk.php?gclid=CPmQwpvJo4gCFRnpXgoduHknSQ
(Accessed on 31/10/06)
DFES, 2006 "Student loans and the question of
debt" Available from:
http://www.dfes.gov.uk/hegateway/uploads/Debt%20-%20FINAL.pdf (Accessed on
31/10/06)
Dwelley S. 2006 "Student debt and how to deal with it"
Available from: http://graduate.monster.co.uk/8663_en-GB_p1.asp (Accessed on
31/10/06)
Education Guardian. 2006 "Market logic turns a degree into a
share certificate" Available from:
http://education.guardian.co.uk/students/tuitionfees/story/0,,1840824,00.html
(Accessed on 31/10/06)
NatWest 2006 "Avoiding the student debt trap"
Available from: http://www.he.courses-careers.com/debt.htm (Accessed on
31/10/06)
RBS, 2006 "Credit Cards" Personal Finances Available from:
http://www.rbs.co.uk/Personal_Finances/Credit_Cards/Card_Features_and_Benefits/default.htm
(Accessed on 31/10/06)
SDRT 2006 "Student Debt Reduction Team" Available
from: http://www.wessexscene.co.uk/article.php?sid=273 (Accessed on
31/10/06)
Copyright ?2006 Verena Veneeva
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