Student guide to debt: how to manage student debt

Students face a variety of financial pressures while at university, from rent to tuition to cost of living. If you don't keep a close eye on your finances, it can be easy to slip into debt. This Debt Awareness Week, to help you keep track of your spending and manage any issues that may arise, we've put together a complete guide on how to manage student debt. 

What is debt?

Debt is money that you have borrowed from a person or organisation and need to pay back. Typically, you will be charged interest by the party that loaned you the money, meaning that you may end up paying back more than you originally borrowed.

Common sources of debt for students 

Students can rack up debt in a variety of different ways. Most of the time, you should be able to make repayments on time and stay on top of what you owe. But it's important to be aware of how you might fall into debt so you can plan accordingly.

Common sources of debt for students include: 

Credit cards

When you make a purchase using a credit card, you're borrowing money from the bank which you will need to repay later. The longer you take to clear your credit payments, the more you will have to pay in interest. This means that using a credit card can actually make purchases more expensive. 

If you fall behind on your credit card repayments, your debt will become larger. If you can, it's always a good idea to pay your balance in full when you receive your monthly credit card statement. Doing this can actually boost your credit score.

Overdrafts

An overdraft allows you to withdraw or spend more money than you actually have in your account, up to a pre-agreed amount. Usually, this limit is between £1,000 and £3,000 depending on your credit score and bank account. Student bank accounts usually come with a 0% overdraft, meaning that they will be interest-free if used properly. Bear in mind, though, that after your student or graduate bank account expires, your 0% overdraft will expire too. This means that you'll start accruing interest on anything that you still owe at that point. 

To avoid getting into debt, it's important to remember that your overdraft is not free money and you will need to pay it back. You should try to create a budget or plan to ensure that you're able to do this. You should also try to avoid going into an unarranged overdraft, as this can result in paying additional interest or fees. 

Rent and bills

You might not think of your rent and bills as something that could get you into debt but remember that you are entering into an agreement where you owe money every month. Paying late or ignoring reminders could harm your credit score, result in your details being passed on to a debt collection agency, cause you to be threatened with a court summons, or even have your utilities cut off. 

To avoid late payments on your rent or bills, it's a good idea to set up a Direct Debit so the payments are made automatically. Of course, you'll still need to ensure that there's enough money in your account to cover the payments each month.

Buy now, pay later schemes 

Buy now, pay later schemes like Klarna allow you to make purchases from major retailers without paying immediately. Usually you can either choose to pay what you owe within 30 days or pay in three interest-free instalments. 

This might sound like an amazing deal but when you miss payment deadlines you can be faced with interest. Typically, paying through buy now, pay later schemes will cause you to actually spend more money than if you made the purchase upfront. 

Does your student loan count as debt?

Technically, if you take out a student loan for tuition or maintenance costs then you are in debt. However, you shouldn't think of your student loan as a negative source of debt or a cause of a debt problem.

Remember, that you only need to start repaying your loan after you leave university and you are earning over £27,660 per year. The amount that you pay will also change depending on how much you're earning. Most of the time, your student loan payments will be automatically deducted from your paycheck once you're earning enough so you don't need to worry about remembering to make payments or falling behind.

Your student loan could also be written off before you've finished repaying it. Depending on the type of loan you have, your loan will be written off after 25, 30, or 40 years from the April you first started repaying.

Is all debt bad?

Not all debt is automatically bad. For example, your student loan could be seen as an example of good debt, that helps to further your life. If you take on debt responsibly, for the right reasons, at the right price, and with a solid repayment plan then it could actively improve your credit score. Other examples of good debt could include a mortgage or a credit card you have taken out with the intention of improving your credit score. 

By contrast, bad debt is the type that you accrue through non-essential, impulse purchases. It is also not a good idea to take on debt without a clear idea of how you will make repayments.

How to assess if you have a debt problem 

It can be challenging to accept that you have a debt problem. You don't necessarily have to owe thousands to have a problem with debt. Issues with money can start smaller and gradually grow. 

You might have a debt problem if any of the following warning signs apply:

• You're consistently worried about money
• You regularly use your overdraft or credit card to cover the cost of daily necessities and essentials 
• You're regularly late paying your bills or making repayments 
• You avoid looking at your bank statements
• You owe money to multiple people or organisations
• You have had official warnings from a bailiff, lender, or organisation

Where to get debt advice 

If you fall into debt and need assistance, it's essential that you get impartial advice from an expert. This means contacting a professional or organisation that does not earn commission from recommending financial products. 

You can get free financial advice from:

• Debt Advice Foundation
• National Debtline 
• StepChange 

You can also get guidance from charities like Shelter, Citizens Advice, or Disability Rights UK. 

Alternatively, you can speak to the finance team or student money advice service at your university. They should be able to help you create a plan to tackle your debt or point you in the direction of further advice and resources.

Ways to deal with debt 

If you're struggling with debt issues, it's important to always seek official advice from a professional. 

However, you can also make some small changes in your life that will help you begin to tackle your debt. These can include:

• Make a weekly budget to keep your spending under control and cut back on non-essential spending
• Work out how much you need to pay back per week to clear your debt and include these payments in your budget
• Get a part-time job while at university to supplement your income 

Streamline your budget this Debt Awareness Week

These tips and resources should help you to make more informed decisions if you find yourself struggling with debt problems. 

For more advice on how to manage your finances while at university, check out our blog on the best budgeting tips for students.