How much student debt will ever be repaid?

student debt

Students in England are set to graduate with average debts of £50,800 each - after interest rates on student loans were raised to 6.1%, and maximum student fees were raised from £9,000 to £9,250. Things are even bleaker for those from less affluent backgrounds, who will end up borrowing close to £57,000. It's a terrible burden to be carrying before you even have a chance to get on your feet, but it's worth getting to grips with exactly how much of a burden it is - and how much students will end up paying back.

SEE ALSO: High-flying jobs that don't need a degree

See also: 47% of students 'consider themselves university customers'

The figures from the Institute of Fiscal Studies have sparked a debate. There are those who argue that student debts are destroying the financial hopes of all young graduates. It affects their ability to save for a property, stops them having enough spare cash to save for their retirement, and breeds a casual acceptance of debt that can push them further and further into the red.

Some commentators point out that accruing interest at 6.1% on the loan from day one - well before they have any chance to make any cash and make repayments - is wildly unfair, because students will have built up average interest charges of £5,800 before they have graduated.

There are others who argue that student debt is actually only going to be an issue for high earners, because after 30 years these loans are written off, and those who earn less will get 30 years down the track without repaying their debts in full. The IFS forecasts that around three quarters of students will have their loans cancelled before they pay them in full.

The jobs where debts are written off

A study by MyVoucherCodes looked at who was likely to end up having to pay their debts in full - and who would end up having their debts cancelled. They examined average student debts for specific subjects, average starting salaries for careers linked to those subjects, and typical pay rises. They found that a student's subject choice and career has an enormous impact on their likelihood of having to repay their debts.

A number of careers pay well enough to require full repayment of the loan. These include careers in mechanical engineering, medical science, civil engineering, HR, marketing, consulting, accountancy investment banking and financial management.

Those on very high salaries have to pay their loans off faster than those in marginally worse-paid careers, but on the flip side they run up lower interest charges. Those who go into financial management, for example, pay off their debts within 13 years and nine months on average, and pay a total of £14,692 in interest. Mechanical engineers, by contrast, take 29 years and four months to pay off their loans, which means a total of £27,930 in interest.

The study found a number of careers where people pay off their loans on the cusp of 30 years - and therefore spend a fortune in interest. Alongside mechanical engineers, this includes medical scientists who repay after 28 years and 10 months - and spend £27,713 in interest; civil engineers who repay in 28 years and spend £26,705 in interest, and people in HR who pay it off in 27 years and 10 months - at a cost of £26,613 in interest.

Those with bigger bills pay enormous amounts of interest - despite having a big chunk of their debts written off. The most striking example is vets, who study for so long that they end up with typical debts of £82,326. This is eventually written off after 30 years, with them only ever having repaid 53% of the loan - although unfortunately they will also have paid £25,195 in interest.

And those in lower-paid careers enjoy the benefits of not having to pay their debts - while also facing the prospect of working in an industry that pays very poorly. These include those who go into retail management, who will only ever pay 53% of their debt - and £7,440 in interest, and those who go into publishing and journalism who will repay just 43% - and £4,200 in interest.

What can parents do?

Parents are naturally inclined to try to keep their children's debts as low as possible - and help when they can - but given that the loans may eventually be written off, this may not be the best possible approach.

Certainly, parents need to put aside as much as possible to cover their children's living costs - which usually plunges them into debt way beyond official student loans. That way they can ensure that their child simply graduates with student loans.

In an ideal world, they also need to save whatever they can to pay off their child's student loans - but then hang fire. If their child graduates and seems to be heading on a high-flying well-paid track, then paying their debts as quickly as possible may well save them tens of thousands of pounds.

If they graduate into a low-paying career, then they will have nothing to pay for years - and even then are likely to have a major chunk of their debt written off without ever paying it. In those cases, the money that their parents have put aside could help provide a step onto the property ladder - or make an impressive early start on their pension.

Most common causes of debt
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Most common causes of debt

There are some very common reasons for building up problem debts. Here we reveal seven of the most common, and what you can do if you face them.

Unemployment or illness that means one or more of the household’s earners are unable to work will bring a profound change in family finances, and according to the Money Advice Service is the most common reason for getting into problem debt.

If your circumstances change, therefore, you need to immediately address your family finances, and put everything on a minimum spend lockdown. You should also look into the benefits and tax credits that are available sooner rather than later, to try to close the gap.

If you are on the kind of contract that means varying hours, it can be incredibly difficult to work out what you can afford to spend - making it the second most common reason for getting into debt - according to the Debt Support Trust.

Rather than swinging through the extremes from week to week, the best approach is to establish a budget that will work in the leanest of months, so you don't find yourself getting used to the months when you work more hours.

According to Citizens Advice, trying to service too much debt is the third most common reason for getting into difficulties. The TUC found that those with problem debts spend 40% of their income on debt repayments.

If you are in this position, you officially need some help with your debt problems. If you continue to rob Peter to pay Paul, you will end up owing more and more, so you need to take stock and talk to a debt charity about all your options.

The double-whammy of the legal bills combined with the incredible cost of establishing two separate households is enough to make divorce or separation the fourth most common reason for going into debt - according to the Debt Support Trust.

There's no easy solution, but if you are going through this, it can be helpful to talk through your financial situation with someone you trust or a debt charity, who can help you balance a stretched budget.

Problem debts aren’t necessarily caused by a sudden shock to the system. According to the Money Advice Service, 20% of their clients are simply trying to live on an unsustainably low income.

If you are in this category, it’s important to seek help on the benefits and tax credits you may be able to receive. It’s not always easy to navigate the system, but charities like StepChange have experts on the benefits system who can talk you through what’s available.

The combination of rising costs and stagnating wages over the last few years has meant increasingly people saw their monthly wage cover less and less of their monthly outgoings. This position has started to ease more recently, but has left many people far worse off than before the financial crisis. The Money Advice Trust said a combination of this and unexpected costs was responsible for almost one in ten problem debts.

If you consistently spend more than you are expecting, it's well worth keeping a spending diary. That way you can establish the real cost of living, and start to identify where you can cut costs.

The Money Advice Service says it commonly deals with individuals who have struggled to get to grips with budgeting and debts, and have got into debt because they don’t have the skills and knowledge to manage their money effectively.


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