Help your child avoid student debt
While your children are off at university, it's normal to worry about what they are getting up get up to and how they are coping living away from home. But another big concern for parents is how much debt they could be racking up.
"Depending on which survey you read, student debt averages between £15,000 and £20,000," says David White, chief executive of The Children’s Mutual. White predicts that the average student debt will approach £35,000 to £40,000 in the not-too-distant future, thanks to the rising cost of living.
The reality for most parents is that they will have to provide their children with some financial support over the coming 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. If you can support your children financially, that’s great, says Bev Budsworth, an adviser at DebtAdviser.co.uk, but she warns against shelling out for them all the time, as this can result in "learned helplessness".
As well as failing to educate your children about the true cost of things, the desire to bail out your kids 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 current economic climate, and is not sustainable in the long run.
A better way to help your child is to to instil them with 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.
"Freebies will last a second compared with the account, which you could be using well into your twenties," says Laura Howard, a financial journalist and author of A Girl’s Guide to Money.
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%, 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.
"If you think you’re likely to exceed the limit, see how much the charges are. This is probably more important than the interest rates," Howard adds.
Although now a regular contributor to Moneywise, Laura Howard wasn’t always so good with her cash and learnt her lesson the hard way. The Sheffield Hallam English graduate started university with no savings and immediately went overdrawn. Although she received a student loan and worked part-time at a pub, she was consistently in the red, spending the cash on clothes and nights out.
"Finally, the bank tired of me constantly going over my limit, so they rang me to say they’d referred my HSBC overdraft to a debt recovery unit. I was at home with my three flatmates at the time, and we thought it was hilarious," she recalls.
But the laughs didn’t last long. Banks outsource bad debt to private companies so that it’s off their hands: Laura ended up paying back 40% interest on her outsourced debts to the GE recovery bank.
A typical debt spiral ensued, with Laura using credit cards - and even her Debenhams store card - to take out cash for rent, and in her final year Laura ended up working five evenings and five lunchtimes a week at the pub just to keep her head above water. "The effects lasted into my late twenties. It took me 10 years to get out of debt. I wish I’d done things differently," she says.
The free money trap
Many students also fall foul of the ‘free-money’ syndrome with credit cards. According to NUS 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 0% interest on purchases, so if they do need to do some spending then they can at least spread out their repayments without getting more into debt.
Leanne Chamberlain, who studied business with Spanish and French at Hull University, spent to the limit of her overdraft, and also made free use of credit cards, paying 17% interest on one. "I thought of it as my own money," she says. It wasn’t until after she graduated and had £3,000 to pay on her credit cards that Leanne realised it made sense to switch to one that paid 0% interest.
David White says credit cards should only be used in emergencies, but recognises that years of seeing mum and dad pull out the plastic to pay for everything may be partly to blame for young adults’ free-and-easy attitude to credit cards. "What they don’t see is the parents opening the bills later," he adds.
While many parents don’t like the idea of their child taking out a loan, student loans are a cheap way of borrowing and can cover tuition fees and general living costs. Students won’t have to repay the loan until they’re earning more than £15,000, and then they’ll only pay 9% of any earnings over that. Loans aren’t interest-free, but the rate (currently 4.8%) is well below that of any commercial loan. Graduates can also take ‘repayment holidays’ if they’re struggling with payments.
If you have enough money to fund your child’s university costs and would rather avoid a loan, they’re unlikely to complain, but be careful of throwing too much money at them. Today’s students come fully kitted-out with laptops and trendy wardrobes, and are more likely to eat chorizo on ciabatta than baked beans on toast. "Students need to rethink this designer lifestyle - we all like to look good, but there needs to be a limit," says Bev Budsworth.
Set the guidelines
It may be hard, but you should tell your kids just how much financial support you can offer. Phillip Hodson, a fellow at the British Association for Counselling and Psychotherapy, points out that showing your children you love them doesn’t necessarily mean handing them money.
"Part of adulthood is about financing your own life. Tell your kids at the start: ‘I’m not here to fund your rock-and-roll lifestyle or that expensive ski-trip’, " he says.
Of course, it’s difficult when your children call up with tales of how poor they are or how they can’t afford to go out with friends, but Hodson says you need to be consistent. It’s worse to say no and then yes, as they’ll know they can get round you. "Every business has a reserve, and if you say at the start of the year: ‘This is the reserve, but once it’s gone, that’s it’, your child knows the limits," he advises.
This will require some ‘tough love’, but you can help your child to manage their money and not spend it all in fresher’s week by teaching them some basic budgeting skills.
Drawing up a budget is a daunting task for anyone, let alone a student who hasn’t had to worry about rent or bills before, but it’s key to learning how to manage your money. Sit down with your child before they head off and get them to list all the expenses they’ll have each month, such as rent, food, bills and books. After working out the necessities, they can see how much ‘fun money’ they have left.
Get them to do the same again once they’re at university and can factor in extra costs like taxis after a night out, friends’ birthdays and extra books. They should then look at it once a month to keep on top of things.
One way of keeping debts to a minimum could be a part-time job. This can also be a great way for them to learn time-management skills as they juggle the demands of their studies with their job and social life.
According to a survey by NatWest, 40% of undergraduates will work part-time this academic year - 25,000 more than last year. However, students must take care to strike the right balance: the NUS Students at Work Survey revealed that 59% of students who worked during term-time felt it affected their studies, with 38% missing lectures and 21% failing to hand in coursework.
Every parent wants their child to do well in their degree and have the best possible experience at university, without getting up to their eyes in debt. But while it may be inevitable that you have to give them a little financial support, talking to your child about money before they start their studies could save you both a fortune over the years.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.