Advice for Scottish graduates repaying student debt
As the graduation season begins, BBC Scotland education correspondent Jamie McIvor offers advice to Scottish graduates on paying back their student debt.
How does the student funding system in Scotland work?
Scottish students at Scottish universities do not pay tuition fees. However they usually have to borrow substantial amounts of money towards living expenses.
They are entitled to a maintenance loan which is means-tested and based on household and circumstances. The maximum they can receive is £5,750 a year and the minimum loan is £4,750. This alone implies that a graduate who had completed a four year degree would owe almost £20,000.
Those under 25 who come from families where household income is below £34,000 a year can also apply for a "Young Students' Bursary" which does not need to be paid back. They can receive up to £1,875 if their annual household income is below £18,999.
Figures from the Student Loans Company indicate that the average level of graduate debt in Scotland is the lowest in the UK.
Additional funding is also available for students in particular circumstances - for instance "independent" students such as most mature students.
Outside the state funding system, students may also be able to apply for private bursaries - for example money from a trust established in a will to help students from a particular area or who are taking particular courses.
What sort of debts might a student build up?
It's important to distinguish between the two fundamentally different sorts of debt which may be incurred by students.
- Money borrowed from the Student Loan Company towards living expenses. The amount which can be borrowed is strictly controlled and so are the minimum repayments.
- Any other debt such as credit card debt, money owed on store cards, ordinary bank loans or money borrowed from other commercial lenders.
How is money owed to the Student Loan Company paid back?
A Scot who graduates this year will not have to start repayments until next April at the earliest but will not need to begin repaying their loans until they earn more than £17,775 a year. The repayments are not a graduate tax but, from the borrower's point of view, operate in a similar way to one in a purely practical sense.
The monthly repayments are determined by income - not the amount owed. The graduate would pay back 9% of their income above £17,775. Normally it would be deducted from the payroll in the same way as income tax or National Insurance.
For example, someone earning £21,000 a year would pay back £24 a month. The more someone earns, the more they will repay. The monthly cost will not increase if payments are deferred.
If your monthly income temporarily goes over the threshold, perhaps because of an overtime payment, but your annual salary remains below it you may be able to claim a refund.
Is there any advantage in making overpayments to the Student Loan Company?
There are a number of factors to weigh up.
If you have spare cash, you may be tempted to make occasional voluntary additional payments to help clear your loan early. An overpayment would mean that, over time, you are paying less in interest so pay less in total.
However because the regular, ongoing monthly repayment would not be reduced by one-off overpayments, however significant, there would be no immediate advantage in reducing the debt.
If you have spare money and you feel that clearing this debt is a top priority, you might want to explore putting the money into a bank account or an ISA. There may come the point when the amount of money in the account would be enough to completely clear the student debt in one go so the regular monthly repayments would end. However, while you saved up you would still have the money should you need it for something else.
Would the thousands, even tens of thousands, of pounds worth of debt someone owes to the Student Loan Company make it impossible to get a mortgage or a normal bank loan ?
No - as long as you are making the scheduled repayments, this debt would not lead to someone getting a poor credit record.
If you want a mortgage or a bank loan, the person assessing the application would look at your income and outgoings. Because repayments to the Student Loan Company are normally taken off at the payroll, they simply have the effect of reducing your monthly income after deductions and, by implication, your disposable income.
I owe money to the Student Loan Company and have other debts too. How should I go about clearing them?
It would be a good idea to talk through your situation with a financial adviser, a bank manager or someone from an organisation such as Citizens Advice Scotland.
In broad terms, the student loan should be viewed separately to any normal commercial debt.
One option to consider may be consolidating all the commercial debt into one bank loan. That way you could put all the debt together and agree terms to pay back the bank loan. That makes the debt easier to manage and sets a clear timescale for clearing it. It may well also be significantly less expensive over time.
I am scared of debt - was going to university the right thing to do?
In general, graduates earn higher salaries than those who did not go to university and have a greater chance of going on to highly paid jobs in the future. Someone in their early 20s without a degree who earns significantly more than the £17,775 threshold for repayments would be extremely fortunate.
For many graduates, it is reasonable to argue that the money they are paying back to the Student Loan Company is money which they would probably not otherwise have earned.
Of course, not everyone goes to university to get a better job or earns a higher salary as a direct result of their degree. Some graduates do not secure well paid jobs or leave the workplace - perhaps to become a parent or a carer - or may simply have taken their degree for the satisfaction of doing so. The £17,775 threshold means they may well avoid repayments completely.
Student loan debt would automatically be cleared after 35 years or if you die before the loan is repaid.
Some of this information only applies to Scottish students who studied at universities in Scotland. Different information would apply to Scots who studied in other parts of the UK or students from England, Wales or Northern Ireland who studied in Scotland.