Student finances 2016/17: what you need to know
Studying for a degree is one of the biggest expenses your child is likely to face during their lifetime, up there with getting married, buying a home and saving for retirement.
Few parents have the cash saved up to fund tuition fees, currently costing up to £9,000 a year, let alone living costs on top, so student loans are the obvious first port of call for anyone needing to borrow to study.
Tuition fee loans lend you up to £9,000 (or up to £6,000 for a private course provider), paid directly to the course provider, and you won’t have to pay it back until after your course, when you’re earning above a certain level.
Maintenance loans can be applied for at the same time, lending you money at the start of each term (or monthly in Scotland). How much you get depends on your household income, where you study, where you live and how long for.
But while the maximum maintenance loans on offer to cover living costs look quite generous – up to £6,904 for first-year English and Welsh students living at home, and up to a maximum of £8,200 outside London or £10,702 in London for those living away from home – your child might not be offered this. The amount a student is awarded is dependent on their family’s household income, even if the parents are not contributing towards their child’s keep.
Most students entering higher education in the 2016/17 academic year will have already applied for tuition and maintenance loans and know how much they have to live on for the next 12 months. What is less clear is how far those loans will stretch and how they should make up any shortfall in funding.
Drawing up and sticking to a budget is crucial if a student needs to make their money last. The first year is a good time to learn how to do this as the really expensive bit – paying for accommodation in university halls – is dealt with right at the beginning.
While loans to cover tuition fees go straight to the university or college, maintenance loans are normally paid in three instalments – one at the start of each term – straight into the student’s bank account.
University terms typically last 10 weeks, but accommodation costs are likely to continue for longer. On average, universities charge rent for rooms in halls for 41 weeks a year, and a private landlord may ask you to sign a contract for up to 52 weeks. Remember that once a student moves out of university accommodation, they will also have to pay for electricity, gas, water, phone and internet in addition to food, transport, laundry, books and money for socialising.
It is important that students buy insurance to cover their belongings while at university. Some university halls of residence may have cover in place, so check before you buy.
Endsleigh specialises in cover for students, is recommended by the National Union of Students and won Best Provider for Contents Insurance at the Moneywise Customer Service Awards 2016. However, you also should do a contents insurance comparison to make sure you are getting value for money. TopCashback.co.uk won Most Trusted Insurance Comparison Site at the Moneywise Customer Service Awards 2016, with Comparethemarket.com being highly commended.
Parents could help reduce the cost by adding cover for student children as an optional extra to their own contents insurance.
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Dealing with shortfalls
The cheapest and safest place to borrow is usually the bank of Mum and Dad. If you do not have cash to spare, the next best option is to make use of the authorised overdraft facility that comes with a student current account. In fact, many students base their choice of student account on the size of authorised overdraft on offer.
It is very important not to exceed this authorised overdraft limit, as repeated abuse could result in black marks on your child’s credit record, and they will incur very high charges.
Their bank may also offer them a credit card with a maximum credit limit typically ranging from £300 to £1,000. Charlotte Nelson of product comparison website MoneyFacts says students need to be careful about using this option: “Credit cards for students are great as they give users added protection on purchases they would not have if a debit card was used. They also help the student build up a good credit history for later life if all bills are paid on time. “But it can be easy to rack up debt even on a small balance, when you do not have the means to pay it back.”
Above all, students should avoid taking out payday loans – not just because of the extortionate rates or interest they charge, but also because the sight of one lurking on someone’s credit record could prevent them from being able to take out personal loans, credit cards or mortgages later on. Banks regard the use of payday loans as a sign that a borrower cannot manage his or her finances properly and is therefore a bad credit risk.
Ms Nelson adds: “Students who are struggling to make ends meet can talk to their bank to see whether their overdraft limit can be extended and many universities offer crisis loans to help students in difficulty.”
A report published by charity the Intergenerational Foundation in July found that having to pay off student debts will, for most professions, wipe out any ‘graduate premium’ – the extra £100,000 on average that graduates can earn over a lifetime because they have a degree.
There is no penalty for repaying student loans early, and parents often want to help their children clear their debts. But financial expert Martin Lewis of MoneySavingExpert.com argues that it pays to wait until a graduate starts earning before deciding whether it is financially sensible to step in. English and Welsh graduates who started studying after 1 September 2012 only start repaying their loans once they earn £21,000 or more a year before tax.
The repayment is 9% of earnings above that level, so someone earning £25,000 a year before tax would repay £30 a month – 9% of £4,000. Visit Gov.uk/repaying-your-student-loan/overview for more information on this.
Any student loan debt still remaining after 30 years from the April after graduation will be written off. This means that low earners, who make smaller repayments than higher earners, may not pay off the full debt before reaching the end of the 30-year term.
If this is likely to happen, parents wanting to help their children might achieve more by funding a deposit for their first home or car rather than paying down their student loans.
The MoneySavingExpert.com student loan calculator helps you to see how much your child might have to repay based on different earning levels. Visit Moneysavingexpert.com/students/ student-finance-calculator.
“I worked to supplement my student loan”
Alex Kendal (above) is just about to start his second year studying maths and drama at Aberystwyth University. Alex worked before going to university and now during holidays to earn money and this, together with savings built up by his parents for his education, have provided a good financial cushion to fall back on.
He used this to pay for his first year’s accommodation costs of about £5,000, but adds: “If I had to pay for my accommodation with my student loan alone, I would have fallen about £200 short, before buying food or anything else at all. I know for a fact that many of my friends who lived in the same hall of residence struggled with the payments and found themselves living on about £30 a week.”
The biggest financial shock for Alex and five of his friends came when sorting out accommodation for their second year. “We had to pay out £480 at the beginning of May, just as our funds were dwindling, for a summer retainer fee to secure a house that we wouldn’t be living in for three months.”
Short-term cash loans designed to be borrowed mid-way through the month to tide the borrower over until they next get paid, whereupon the loan is settled. Generally used by people with bad credit ratings and/or no access to short-term credit such as an overdraft or credit card. Like logbook loans, this type of borrowing is hugely expensive: the average APR on payday loans is well over 1,000% and in some instances can be considerably more.
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.
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.