Expert answers: Family fears the student debt trap

The reality for most parents is they will have to provide their children with some financial support during their studying years.

However, while parental contributions can go a long way in helping cash-strapped students, there are things you can do to help your children manage their finances without constantly reaching for your wallet or chequebook.

Undoubtedly, students today face greater debts than their parents or those that graduated in the 1990s, and it’s important to recognise this. As well as failing to educate your children about the true cost of things, the desire to bail out your children could cost you financially.

Parents are raiding their own savings, remortgaging their homes and even holding back on pension contributions to help their young adult children. This is particularly worrying in the present economic climate, and is not sustainable in the long run.

A better way to help your child is to instil in them good money habits. Start by helping them choose the right student bank account and steer them away from the banks’ student honey-traps – free MP3 players, mobile phone vouchers and cinema tickets – and back to the realities of what makes a good account.

For the vast majority of students the most important feature to check will be the overdraft facility. But rather than just opt for the largest amount, you should also check to see if the overdraft is interest-free and if it will last beyond graduation – not all do.

Hefty charges for going over the overdraft limit are another factor to consider, so check the unauthorised overdraft interest rates which can be as much as 30 per cent, as well as the authorised one, and point out to your children that, if they think they’re going to exceed their limit, it will cost them less in the long run to phone the bank and ask for an extension than to bury their head in the sand.

While many parents don’t like the idea of their child taking out a loan, student loans are a cheaper way of borrowing and can cover tuition fees and general living costs. Next year’s students won’t have to repay the loan until they’re earning more than £21,000, and then they’ll only pay nine per cent of any earnings over that threshold. The interest rate on loans is generally below that of typical commercial loans. Graduates can also take repayment holidays if they’re struggling with payments.

It may be hard, but you should tell your children how much financial support you can offer. Help them to draw up a budget and try to make sure they stick to it.

Paul Charlson

GP from Brough

I THINK you need to look at the issue of tuition fees again. The rise in fees comes in 2012 for new entrants. Your eldest will miss this if he goes in October 2011.

If your son goes to university in 2012 and pays £9,000 a year he will only have to pay the fees back if he earns over £21,000 a year and then only at an affordable rate.

The loan will not attract any interest. It is only if your son earns over £41,000 a year that he will have to pay about three per cent interest on the loan and still only pay it back slowly unless he chooses otherwise.

A good degree is a passport to high income in the future. Frankly it is worth the investment for all your children – I would not hesitate.

University applications may go down the year or so after the higher fees come into force making it easier to get into the top universities. This presents an opportunity.

Elaine Douglas

A chartered psychologist who specialises in family and child relationships

EDUCATION at whatever level should be affordable for everyone who has the ability and desire to access it, and like you I am appalled by the fact that young people are coming out of university with a millstone around their neck. However, at HE level education does cost, and did in the days when I was an undergraduate – the difference now is the scale of those costs and how to manage them. I don’t think that you will be compromising your principles by supporting your child in their wish to go to university. Look at it this way most people these days have a mortgage. They cannot afford to buy a property outright and so they take out what is in effect a huge loan over a long number of years to enable them to have a comfortable home and lifestyle. Perhaps you can view this in a similar way – ie it’s an investment in your child’s future. Research shows that employment prospects and salaries are better for graduates, although these days it has to be said that having a degree doesn’t necessarily guarantee that. However, those students who study a vocational degree seem to have a better chance.

Cary Cooper

Professor of Organisational Psychology and Health at Lancaster University

IF you have embedded in your children that they should live within their means, then that probably has been internalised in them and they should respond. You ought to let all of them know about your financial circumstances in any case, so that they know there is no safety net available to bail them out if they get themselves in debt. The tuition fees should not be a problem for them straight away, and will only be paid back after they are earning over £21,000 under the new tuition fees regime to be introduced in 2012. In the end, they have to weigh up the advantages of a university education and the debt they are likely to incur in the medium term.

Dr Carol Burniston

Consultant Clinical Child Psychologist

A university education is a wonderful experience and a stepping stone to a better future. Today many parents cannot afford the total cost of three years of college and I fear that this situation will get worse. I admire your desire to be fair by all your children and it is important to explain this to your son from the outset. There are ways of obtaining assistance, for example, student loans and most universities have some sort of financial support for young people from less affluent backgrounds. I am in total agreement that young people should be brought up to manage their finances appropriately, but I also think that the investment in a good education is worth the cost of borrowing. Most courses enable students to work part-time and your son should be able to support himself to some degree by working. Ensure that he knows how much money he has to spend on a weekly basis. I would also suggest that you ensure there is a possibility of a career after completing the degree course. The university should be able to tell you how many of their graduates are in employment after leaving, some courses are more likely to lead to work than others.

BEWARE “FREE MONEY” CARDS

many students also fall foul of the “free-money” syndrome with credit cards. According to National Union of Students figures, the average amount for student credit card debt is £1,249.

As with overdrafts, it’s sometimes difficult for students to register that this isn’t their money to spend as they wish, and that it will eventually need to be paid back.

However, many students may be able to get a credit card with zero per cent interest on purchases, so if they do need to do some spending then they can at least spread out their repayments without going into further debt.