Student loans are ‘gateway to more debt’, study finds

Students have a lot of debt. This much we know.

As final university offers are given up and down the country this week, the cost of what they’re about to do will weigh particularly heavily on the minds of students and their families this year.

Most will leave with £50,000 or more of borrowing.

But new research, released to chime with this nerve-racking week of expensive decision-making, shows that university students and graduates under the age of 40 have almost double the amount of debt as those who didn’t attend university – not counting their student loans.

They owe an average of £12,445 in borrowing on personal loans, credit cards, mortgages and other forms of credit, while those who didn’t go to university owe an average of £7,105, despite the expectation of higher income levels among graduates being used to dismiss concerns about increasingly pricey courses and accommodation.

Crucially, almost half of those with a student or graduate loan say debt has made them more comfortable with other forms of borrowing, and a third even say it has made them more likely to borrow again.

Nine in 10 of those who attended university have some type of credit, excluding their student loan, compared with seven in 10 of those who did not. Graduates are more likely to have a credit card, mortgage, overdraft, retail finance product like “buy now, pay later”, or loan secured against their home, while those not attending university are more likely to have an unsecured loan.

“We know that graduates earn more, and are more likely to have a mortgage by the time they hit 40 years old, but there are signs that this greater exposure to the credit market is also being driven by a greater familiarity with, or even desensitisation to, borrowing while at university,” Paula Roche, managing director of consumer solutions at credit reference agency Equifax UK, which conducted the research, said.

“Whether it’s credit cards or car finance, using the credit system and building up a credit history is one of the best ways to build a positive credit score, which could be giving graduates a further advantage when applying for a mortgage in later life.”

Last month, major changes to student loan terms that are expected to worsen the debt burden for young graduates were announced, including a 10-year increase to the repayment period for new entrants next year, a freeze to the income threshold at which graduates since 2012 repay, and changes to the way that threshold increases over time.

This means graduates going to university this year, and every year since 2012, must repay around £400 more each year. And for those applying to university next year, the number rises to £750 more per year meaning that the next cohort of graduates may still be paying their student loans back well into their sixties.

“While your student loan payments won’t start until you’re earning above a certain salary threshold, many students are offered tempting credit products such as student overdrafts and credit cards,” said Sue Anderson from debt charity, StepChange. “They may seem like a safety net at the time, but they can quickly spiral out of control if you rely on them too much.”

But the study also highlights a need for greater financial education at school so pupils are better equipped with the barrage of financial demands that quickly kick in once they leave.

A quarter of respondents didn’t receive any support or education on managing finances before they turned 18 years old, despite personal financial education having been a part of the core curriculum for the last eight years.

Alarmingly, this number was higher for young women (27 per cent) than for young men (19 per cent), and much higher for those not attending university (28 per cent) than for those that did (19 per cent).

“Whether or not someone goes through higher education, 18-22 is a critical age, when young people will be polishing up their CVs, and getting ready for the world of work,” added Ms Roche. “It’s a little concerning therefore to see that a third of people in this age band have never checked their credit report, their financial CV, and for almost half of that group it’s because they’ve never heard of one.”

Giving advice to students, Ms Anderson warned that “getting in the habit of budgeting and living within your means is key to staying out of debt”.

She added: “If you find that you’re already in debt, help and support is available but it’s really important that you don’t make your situation any worse. This means resisting using credit or store cards, not extending your overdraft and avoiding high-cost credit like payday loans.

“If you’ve fallen into debt during your studies, or you’re in danger of getting into debt, there are various ways you can get help. Your student union can advise you on financial assistance you can apply for if you’re struggling with costs such as food and living expenses.”