You’ve spent the last three to five years of your life studying and working hard and, now, you’ve finally done it – you’ve got your degree and now you’re officially a graduate. You absolutely know the struggle you went through to get here and, all of a sudden, the student life you got used to will be replaced by the competitive world of employment and self-employment.
The average debt of a graduate leaving full time studying has risen to over £50,000, according to the Institute of Fiscal Studies (source: BBC News). Students from poorer backgrounds who are more reliant on loans and likely to receive less financial help from their parents graduate with debts of over £57,000.
Not all of those debts will be from studying and maintenance grants. Many of the debts will have been built up on credit cards, longer-term loans, and overdrafts. In this article, Loan Princess examines the options available to students who are thinking about consolidating their debt to reduce the amount they have to pay back to finance companies every month.
Student loan company debt
You should probably not consider consolidating debts you owe to the Student Loans Company (SLC) as part of any financial plan until you have earned significantly above the minimum repayment amount for a number of successive years. If you do so, you could actually be making life more difficult for yourself because you’ll effectively being paying your student loan back through your debt consolidation when, if you had kept your original SLC account, you wouldn’t have had to be paying back anything. How’s that?
You only start paying your student loan back once you have started to earn £25,000 a year or more if you studied in England or Wales after September 1st, 2012 (Plan 1 loan). If your course started before September 1st, 2012 or you took a loan from the Northern Irish or Scottish versions of the SLC, you start to pay back once you’re earning £18,330 (Plan 2 loan).
Once you have passed those thresholds, you start to pay back your loan if you are employed by someone else or you’re self-employed regardless of whether based in the UK or overseas.
You’ll pay back 9% of the money you earn once you qualify for repayments. The current interest rate for Plan 1 loans is 1.5% although this does vary from year to year. For Plan 2 loan repayment, the interest rate is whatever the RPI measure of inflation is plus 3% – so, if the RPI rate of inflation is 2%, your interest rate will be 5%.
It is really only worth consolidating your student debt if you earn way in excess of the minimum threshold as a Plan 2 borrower and you can afford to set aside more than 9% of your post-tax salary to repay your debt consolidation loan. Even then, it will probably be cheaper just to make direct over-payments to SLC.
Therefore, for nearly all students, there is no financial sense in including your SLC debt as part of a debt consolidation loan. But, as we mentioned earlier, SLC debt is not the only type of debt which students across when they’re at University.
Other debt you have accumulated
Whatever the salary you’re paid in your first one or two jobs after leaving University, the best thing you can do to give yourself the financial room to enjoy life and to begin to accumulate savings is to be really careful with your money at all times.
Don’t want to move back to your parents but can’t afford a flat on your own? Share the costs with friends by moving in together. With the money you save, set yourself a weekly treat budget and try not to exceed it. If you can, promise yourself that you’ll save 15% of your after-tax pay to put into an ISA and consider putting 5% of your pay into a workplace pension.
Banks do offer graduate accounts, specifically designed to give you an extended period of time to get yourself back into the black as you enter the world of work. Sometimes, you might have up to 5 years to pay back your overdraft – if the interest rate is about 10% and you do take 5 years to pay it back, you will be paying a lot of money back over that time. You’ll pay even more if you find yourself slipping into unauthorised overdrafts – they’re very expensive – so much so that the Financial Conduct Authority is expected to clamp down on them soon.
With your overdraft and credit card repayments, make sure that you pay off at least the minimum repayment each month. Every repayment you miss, the harder it will be for you to get credit from other providers in the future.
You may have run up debts of up to £10,000 or even £15,000 to credit card companies, on your overdraft, and on non-SLC loans while you were studying. Could you have more to spend each month and pay back your debt quicker with a student debt consolidation loan? Let’s look at the figures.
Loan Princess and debt consolidation loans for graduates
Debt consolidation loans work by replacing all the debts you’ve got now with one single debt with a lower interest rate. Let’s say that, during your studies, you built up £12,000 worth of debt – £6,000 of which was on credit cards, £3,000 on your overdraft, and £3,000 on non-SLC loans.
Let’s say that, on average, the interest rate proportionately spread over your debts was 15%. With a debt consolidation loan, you would borrow the amount you owe to each of these finance companies and pay them all off straight away. If the interest rate on your debt consolidation loan was 7%, then you’d pay back less each month and you’d pay back less interest overall by the time you became debt-free.
If you only pay off the minimum amount on your credit cards each year, it can take up to two decades to pay it all off. With a debt consolidation loan, you know all the debt you amassed on your credit cards would be paid off in three years or five years – however long you took the loan out for.
That’s how debt consolidation loans for graduates work. Here at Loan Princess, we have a large panel of debt consolidation loan companies, many of whom are happy to work with new graduates. Simply enter your details on our application form and, within seconds, we’ll come back to you with the very best offer we find. If you want to proceed, simply read the terms and conditions, make sure you can comfortably afford the monthly repayments, and then sign the online acceptance form.
To start your debt consolidation loan for graduates application, please click here.