Warn­ing stu­dents against debt may be more danger­ous than you think

The Jewish Chronicle - - News -

This is the first of a new fort­nightly col­umn by the JC’s Money Men­sch, Martin Lewis, of­fer­ing in-depth cash-sav­ing ad­vice. The col­umn will al­ter­nate with his reg­u­lar Money Men­sch tips

THIS IS a stark warn­ing to par­ents and grand­par­ents. If you’re one of those peo­ple who proudly tell your stu­dent off­spring: “Don’t get into debt, don’t bor­row a penny,” then I want to wag my fin­ger at you. It’s pos­si­ble that do­ing this will make things worse.

In an age where al­most half the coun­try’s school-leavers go to uni­ver­sity, this sort of well-mean­ing ad­vice could pose huge prob­lems to their long-term prospects. Some of you may deem this con­tro­ver­sial, but I refuse to apol­o­gise.

Let me ex­plain. Th­ese days, a ma­jor­ity of stu­dents have to bor­row to go to col­lege or uni­ver­sity by tak­ing out a stu­dent loan. It’s gov­ern­menten­forced bor­row­ing. This in it­self isn’t a prob­lem for me. What an­noys me is that we are a na­tion that hap­pily ed­u­cates our stu­dents into debt but never ed­u­cates them about debt.

Our elected leaders bang on about a debt na­tion, yet at the same time are des­per­ate to en­cour­age uni­ver­sity par­tic­i­pa­tion and home own­er­ship — both of which, for all but the su­per­rich, re­quire se­ri­ous bor­row­ing.

On top of this, there’s no com­pul­sory fi­nan­cial ed­u­ca­tion in our schools to pre­pare them for it. This in­ex­cus­able at­ti­tude has left a fi­nan­cially and debt-il­lit­er­ate na­tion, and our youngsters are not equipped with the tools to de­lin­eate be­tween the good and the bad when it comes to bor­row­ing.

So let me say it again, only louder and clearer this time: un­less you’re ridicu­lously rich, your stu­dent off­spring will have to bor­row to keep their heads above wa­ter at uni­ver­sity. And telling them not to will only add to their wor­ries.


Let me give you an ex­am­ple, which I’ve en­coun­tered time and again. Lit­tle Jimmy or Jane goes to uni­ver­sity. The last thing they’re told by their fam­ily is not to bor­row, but very quickly they find that they’ve run out of money. So they have no op­tion but to say “to hell with it” and take out a stu­dent loan.

Then, hav­ing al­ready shat­tered the debt taboo, they go a step fur­ther and take out a zero-per-cent over­draft at their bank. Af­ter all, what’s the dif­fer­ence? This ready money all seems too easy, so they ap­ply for a credit-card and the bor­row­ing cy­cle is in full swing.

Be­fore long, they grad­u­ate and find a job. They ex­pect life to be a piece of cake from thereon in, but it’s quite the op­po­site. De­spite hav­ing just made their first ten­ta­tive steps in the work­ing world, they’re weighed down by debt and in­ter­est so they’re not feel­ing the ben­e­fit.

So, as it’s now all seemed easy, they bor­row more to sup­ple­ment their al­ready in­suf­fi­cient in­come. And be­fore long they’re ei­ther in debt cri­sis or still in hock in their 30s.

You may think I’m ex­ag­ger­at­ing, but I’ve spo­ken to count­less peo­ple who’ve found them­selves in ex­actly this po­si­tion. Their prob­lems stem from poor, al­beit well-mean­ing, ad­vice from their fam­ily and the fact that no one ever taught them about bor­row­ing.


We need to ac­cept that they will bor­row, but they must un­der­stand that not all debts are iden­ti­cal; there are rel­a­tively good and very bad debts.

Of­fi­cial Stu­dent Loans — a good debt. In fact, it’s the best long-term debt you’ll ever get. It doesn’t ap­pear on credit files so it will never pose any­one any prob­lems get­ting a mort­gage.

But bet­ter still, grad­u­ates don’t have to pay it back un­til they earn £15,000 or more, and even then they only re­pay nine per cent of the amount they earn above it, so the less they earn, the less they re­pay. The best way to think of it is like a sort of grad­u­ate tax, but one that stops once the money’s re­paid.

And fi­nally the in­ter­est rate is set at the rate of inflation, so, in real terms, the debt doesn’t cost any­thing. If they bor­row a shop­ping trol­ley’s worth of goods now, they will only re­pay enough cash to buy the same shop- ping trol­ley of goods when­ever they pay it off. This year, grad­u­ates are be­ing charged 3.8 per cent, the rate set in March.

Zero-per-cent over­drafts — okay debt. The 0-per-cent over­drafts banks give stu­dents are some­where in the mid­dle. They help stu­dents with cash­flow prob­lems, and in the short-term they don’t cost a penny. But in the long term they can be very costly, as most banks tend to hike up stu­dent over­draft in­ter­est rates the mo­ment their cus­tomer grad­u­ates. Hav­ing said that, they can be a use­ful tool if man­aged cor­rectly and with care.

Com­mer­cial debts -— bad debt. Bad debt is any type of debt charged at com­mer­cial rates of in­ter­est. For stu­dents, this gen­er­ally means cred­itcards or loans. Th­ese are nasty, hideous, evil beasts and grand­par­ents and par­ents alike should rail against them.

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