Why do students get into debt and start borrowing?

Today we’re honoured to welcome guest blogger Owen Burek, editor in chief of Save the Student!. He knows all there is to know about student finances and regularly appears on TV and radio to talk about young people and debt.

Students throw their mortarboards in the air

Debt doesn’t start after student life, but during it

When you boil down the pure finances you tend to find that students are not too different from the general public when it comes to money management.

Of course, the student loan is not something available to non-students but it’s worth seeing this as part of a student’s ‘salary’. While some students get as little as £458 a month from their maintenance loan, and their expenditure far exceeds this, it begs the question: where does the rest of the money come from?

When you consider that rent and bills for most students is more than £350 a month alone this potentially leaves many students with just over £25 a week to spend on food, books, socialising and much more.

It has been well documented that students nowadays have larger outgoings than the funding that is available from the government, a fact that was backed up by Save the Student’s Student Finance Survey 2012.

The survey asked 2,000 students questions on what they spend their money on each month and the findings for an average student were as follows:

  • Rent – £230
  • Food & Essentials – £140
  • Socialising – £120
  • Bills – £60
  • Clothes – £40
  • Travel – £40
  • Mobile Phone – £24
  • Books – £20
  • Insurance – £12

You can find a full analysis of the survey here. The results are interesting and provide a good insight into a student’s budget to help understand borrowing. With a total average spend of £686 compared to the average maintenance loan of just £458 it’s important to look at how students supplement the gap.

It’s not hard to see how some students can end up in debt during their time at university, which is far beyond debt accrued from student loans.

Two types of debt

Ignoring parents, there are essentially two types of student debt. One is with the Student Loans Company and it comes with a reasonable repayment plan meaning students don’t pay anything back until they graduate and earn over £21,000 a year (if starting university in 2012 or after).

The other type of debt that students may encounter is more in line with the general population, which is debt resulting from borrowing money from financial institutions and banks which a student cannot afford to service interest on or repay within a realistic timeframe. With high interest charges and penalties, this debt can easily spiral out of control and lead to serious problems.

How do students supplement the £200 a month gap?

The main four ways that a student can cover the spending gap are funding, parents, borrowing or getting a job.

1. Funding

Students can apply for funding if their household income is below a certain threshold (£42,600 in 2012) and they will be eligible for a grant that does not need to be paid back.

On top of this, there are many bursaries and scholarships on offer to all students based on a number of factors.

If a student finds themselves in serious hardship then they can apply for the Access to Learning fund to keep them afloat.

2. Parents

If the household income is above £42,600 then the government ‘suggests’ that parents should look to support their children through university. It is common practice for parents to pay for their child’s rent during their time at university.

However, this is not always the case and some students have to look for alternative forms of funding their studies.

3. Get a job

A higher proportion of students are looking for part-time or summer jobs to earn some extra money during their studies.

It is a great supplementary source of income, whilst providing real working experience, but it can also act as a distraction to academic study.

4. Borrowing

Generally speaking, borrowing money is not advised as a student and it can lead to a downward spiral of debt. It is suggested that students look to gain money from the three sources above before even considering borrowing to fund their studies.

The least harmful form of borrowing for students is the student bank account 0% overdraft. You can see from this list of student bank accounts that these accounts offer up to £3000 at 0%, although students will have to pay it back within a few years of graduating.

Beyond the student overdraft is a bank loan or form of credit such as a credit card but students should meet with their university’s financial support advisor before considering these options.

It’s clear from the student finance survey that there is a gap between students’ spending and their earnings and that they must look to fill this gap as responsibly as possible without taking themselves into further debt problems or borrowing money that they can’t afford to repay.

Posted by in Living with debt