The Cost of Success

If you’ve just received your A Level results and are debating on whether or not to go to university, the chances are the word that is featuring most prominently in your mind is debt. If racking up a huge debt before you’ve even had to worry about funding a car or buying a house is causing you sleepless nights, you’ll probably feel better knowing that you’re one of thousands who are feeling exactly the same way as you do. *Recent surveys have shown that over two thirds of people who decide not to go to university make their decision based on the estimated debt they will have accumulated at the time of their graduation.

Before making your decision you’ll probably want to examine what funding and borrowing is available and, more importantly, what it will cost you to repay it. The Student Loans Company is certainly worth considering when it comes to borrowing money. The company was formed in 1990 and has been administering the payment and repayment of government funded student loans for the last 16 years. The average student can receive between £4400 and £6200 per annum depending on where they study (students who live in London receive the top amount due to increased cost of living).

It doesn’t take a genius to work out that if you’re considering doing a five year medicine course at a London university you’ll need funding for each year. Then you’re already looking at a debt of at least £31,000. However, if your heart rate has just doubled and you’re finding yourself sweating even more profusely than you were before, you should consider the following;

• You will not need to repay any of the debt whilst you are still studying.
• Upon graduating you will still not be required to repay if your salary is less than £15000 per annum. Each year you are given the option of deferring payments by providing proof of your salary.
• Although interest accrues from the moment you take out the loan, it does so at a rate linked to the rate of inflation in line with the Retail Prices Index. The current rate is 3.2%. The Student Loans Company nor the government make any profit from these loans.
• If you do start work in a job which pays in excess of £15,000 then your repayments will be deducted at source, i.e. your employer will deduct your repayments from your gross salary at a rate of 9%.

If there is such a thing as borrowing money cheaply then this is what the above option represents. Just to place the £31,000 borrowing for the medical student in context, an average doctor, five years after graduating, is earning £48,000. Deducting the 9% at source still leaves a doctor who hasn’t turned 30 on a salary over £40,000.

However for every doctor or lawyer who will have little problem in repaying their debt there are ten times the number of graduates who will find themselves earning between £15,000 and £25,000. Logically the less you are earning the more difficulty you may have in repaying and therefore researching what salary a graduate in your chosen subject earns and what your outgoings (rent, food, transport etc) are likely to be is a pre-emptive yet sensible move.

The other way you can borrow money is through a high street bank and at the outset this may look like an even cheaper option than the Student Loans Company. If you go to any branch of any bank and ask for a Student Account brochure you’ll be dazzled by the array of seemingly free goods and money they are only to happy to throw your way. Two thousand pound interest free overdrafts, credit cards with allegedly low rate APR’s, free Ipod’s, railcards, cinema tickets. Seems too good to be true? It is.

Students are so keenly sought after by banks because of the long term value that they represent. A potentially life long relationship with a lawyer, accountant, vet etc means masses of opportunities for the bank to sell you mortgages, life insurance, car insurance, fee costing accounts but to name a few. An initial outlay of an Ipod costing a little more that £100 and an interest free overdraft of up to £2,500 (remembering that an overdraft will have to be repaid at some point whether is temporarily interest free or not) is a tiny sacrifice for the bank to pay in order to secure your custom when your salary starts rolling in.

A student studying for three years will be enrolled on their course for roughly 120 weeks out of the 156 available. Take the average banks 3rd year overdraft allowance which is typically £2000 and divide it by 120. Your answer is £16.67. If you were to spread your overdraft equally over the length of your course it would buy a round of drinks for you and five or six friends once a week in a cheap student bar. But of course the average person’s overdraft is unlikely to survive Freshers Week as suddenly cash rich 18 year olds start splashing out on necessities such as X Box 360’s, Widescreen TV’s and dangerous amounts of alcohol. The first year overdraft allocation has disappeared and Daddy’s cheque (if you’re lucky enough to receive one) isn’t due for another fortnight. This is where the trouble begins for you and the good times arrive for the bank.

One of the problems with suddenly coming into a great deal of money and becoming accustomed to a spend, spend, spend lifestyle is what happens when all the money dries up. Borrowing money within the limits agreed by your bank is fine but should you exceed those limits then your initially friendly, seductive bank becomes brutal and punitive in the following ways;

• Whilst a cash point will prevent you from withdrawing money which takes you above your agreed overdraft limit there are ways you can inadvertently or deliberately go into the red. It is possible to pay for things by debit card and exceed your overdraft limit by doing so. The banks response to any protestations will be; you’re responsible for running account and no, we won’t refund the charge (of up to £38) that you’ve incurred.
• The obscene charge is suffered each time you exceed your overdraft limit by £10 or more and can be assessed on you up to three times in any one month. I am not joking when I tell you that you can incur £114 worth of charges for three slight misdemeanours during a cash strapped month.
• If you set up any direct debits or standing orders, or write any cheques, and forget/don’t have the money available to pay them you will be charged another £25/35 (dependent on the bank) for your oversight.

It is vitally important to note that whilst you are notified as to when you have incurred charges and what date they will be debited from your account – they will be taken regardless of whether this takes you over or further over your limit. The majority of students that I know have all suffered a charge every now and again because unexpected expenses do occur. However it’s vitally important not to get drawn into a charges cycle. This cycle starts when a student encounters a particularly tough month and incurs three or four charges which total over, say, £100. This money is debited the following month and as a result the student becomes even more under pressure, incurs more charges and so the cycle begins. Horror stories of monthly charges bills totalling more than £400 aren’t uncommon and it’s vital to speak to your bank before things spiral out of control.

The vast majority of students use loans, bank overdrafts, credit cards and any other money they can get their hands on to fund their university experience. Now that universities have started to charge annual fees it’s safe to say that the cost of going to university will almost certainly become increasingly expensive during the next decade. Choosing what to study and where is a huge decision and one that should be discussed with family, friends, and career advisors. Mortgaging your future could be the most sensible decision you ever take should it lead to a successful well paid career. It could also be a decision that leads to several years of financial hardship if you don’t achieve the success that you’d hoped for and if you don’t budget accordingly.

*survey information I obtained from a BBC website which conducted a survey of 1,000 school leavers in 2005.

By Ben Carter