It’s frustrating that the debate around student debt manages to ignore real debt. By real debt, I do not mean student loans that manifest themselves as reductions of salary. I mean big, nasty overdrafts that are given away like freebies at a freshers’ fair, transforming themselves into the heaviest of weights on your mind post-graduation.
It is time for the government and the sector to start recognising overdraft debt as a real issue, and develop policy that addresses the full range of graduate debt. It is about producing tangible, realistic policy solutions to a problem that affects students’ finances as they enter graduate life.
Overdrafts – who, what, why?
Overdrafts are often a necessity of living as a university student. According to the National Student Money Survey 2017, over a third of students find that their maintenance loan is not enough to manage on. It also found that 43% of students rely on a bank overdraft as an additional source of income, and 12% rely on credit cards.
It’s perhaps unsurprising, given how readily banks entice young 18-year-olds with substantial fee-free overdrafts of up to £3,000, and with accompanying giveaways such as free railcards or gadget insurance. I sadly know from experience that these overdrafts are marketed as a natural rite of passage for new students, much like freshers week and the heavy consumption of alcohol.
But they are also an economic necessity when we consider that a third of students find that their maintenance loan is simply not enough and that student finance does not cover the extensive holiday periods afforded to students. Yes, a part-time job can be a way to secure an income, but some institutions limit this, and an overdraft can prove to be a useful financial buffer and a key way to fund student living if you do not have parental support.
The reliance on credit has serious long-term consequences for young people. Overdrafts are different to student loans. They have an effect on your credit score, with high utilisation of credit making a significant difference to graduates’ scores. Of course, the pay-back of the loan is not income contingent, meaning that there is no taper regarding the rate of repayment for lower earners. With banks such as Lloyds changing their policies to charge 1p on every £7 of overdraft – per day – they can be an incredibly expensive way to borrow.
I can speak personally to this – having struggled to pay off £4,000 in overdrafts since graduating, I was hit by new bank policies that meant I was being charged over £3 a day for my debt. Paying it off went from feeling unfeasible to impossible, and it became a psychological as well as a financial burden, where I became acutely aware that every penny spent from my account would end up costing me more.
It also became limiting in terms of career choices. Many fellow graduates have been able to afford to take poorly-paid internships, go into further study, or work in jobs that were highly skilled, yet undervalued in terms of remuneration. For me, it quickly became patently clear that my job search had to focus on roles that were adequately remunerated in order for me to pay off my debt. It can be an isolating experience, especially when public discourse ignores this version of debt, another reason why policy has to begin to focus on this.
Trade-offs between pensions, overdrafts, and student debt
There may be further potential consequences for young graduates, in terms of graduates making trade-offs between pensions, overdrafts, and student debt. Paying back a student loan and paying into a pension is quite the financial burden. Paying off a student loan, into a pension, and paying off an overdraft, is an even more substantial financial burden. Something has to give.
Little research exists on graduates with overdraft debt in particular. The now out of date 2011-12 Student Income and Expenditure survey found that 14% of full-time students relied on commercial credit, and 39% on bank overdrafts, with amounts of £3,131 and £894 respectively. We are, of course, still awaiting the publication of the 2014-15 version: this has been released in Wales but not England.
The reliance on commercial credit increases for part-time students, which accounts for 62% of borrowing – especially concerning given the potential costs of commercial credit. And it’s much higher for part-time students, with average borrowing of £2,192 for commercial credit, compared to £446 for full-time students.
Royal London have reported that graduates are increasingly likely to have reduced pension pots as a result of high student debt and a resultant squeeze in income. Fee and maintenance loans have a role to play here, but overdrafts could be a contributing factor. So overdraft debt may have an impact on pensions. But what is clear is that there are three competing demands on graduates’ finances – pensions, fee loans and overdraft repayment – and it will surely only be affluent graduates who are able to afford all three.
There are also longer-term implications in terms of credit scores. It’s not all bad because demonstrating experience of using and repaying credit can, in fact, enhance your credit score. However, high utilisation of credit facilities can be damaging to credit scores, and so if students are maxing out overdrafts for long periods of time, this is when the damage can be caused. This is particularly important given the myth that having student loan debt impacts on the ability to get a mortgage. That is incorrect – but having a poor credit score resulting from credit usage (with lower disposable income a contributing factor) very much can.
What are the policy solutions?
First, debates around student debt need to mature into recognising this as a problem for students. Stigma exists around debt for people of all ages, but the relentless focus on student loans as the source of debt is a discredit to those living with other forms of debt. It prevents policy tackling this area and obscures the unfortunate financial realities of the 43% of students who do rely on overdrafts as an additional source of income.
Secondly, the government should consider introducing a student loan repayment holiday. Instead of putting graduates in a position of choosing between three competing demands of pensions, overdrafts, and loans (although the third is not a choice), the government should recognise overdraft debt as a problem and offer a solution.
This solution could lie in drawing up a contract with the individual graduate, agreeing a repayment holiday of two years in order to assist them with paying off their overdraft. A contract would help the graduate to prioritise the debt as something to be paid off, and recognise the importance of paying it off.
The repayment holiday would give graduates more disposable income to pay off their other debt, avoiding accruing interest when the overdraft ceases to be fee-free.
And hopefully, it would give the graduate room to save into a pension, helping them build an important habit of saving for the future, as well as making the most of employer contributions and tax-free money.
Scoping out a practical policy such as this, which both aids the graduate financially as well as helping to build their financial capability, is surely something that parties on both sides can agree on.
Student loans are a sexy issue. It is time to make overdraft debt a higher priority, a burning issue – the new sexy issue. And it’s time to tackle it.