Student debt 101

When you leave university, your degree might lead you to a good job - or it might not. From where you stand today, there`s no way of knowing whether you`ll have the skills, the perseverance and the basic good luck to pick up the job you want at the end of your course.

But one thing is just about certain: by the time you get there you`ll be in debt. Unless you`re one of the fortunate few with plenty of financial backing, leaving Uni with a `clean slate` is likely to be tough if not impossible. This year`s graduates are expected to leave university owing somewhere between £20,000 and £25,000.

Debt: if you can`t avoid it, control it

You might not be able to stay out of debt, but that doesn`t mean you can`t keep it under control. Think of this as a three-step damage-limitation process...

Step 1) Careful what you borrow

The less you borrow, the better. It`s a motto that`s led thousands of authors to write thousands of books, the majority of which come down to five words: earn more and spend less.

Earn more

Part-time jobs; holiday jobs; a gap year before university; extra funding (see the bursary map from the Department for Innovation, Universities and Skills).

Spend less

Wherever possible, cut back. The more you can resist the urge to spend, the better your life will be in the future. Spending £100 today can cost you well over £200 if you borrow it at 16% but can`t repay it for five years.

Step 2) Careful how you borrow

Debts differ. There`s a world of difference between student loans and credit cards. Here`s a quick look at the pros & cons of three popular forms of `student` credit.

Overdrafts

Pros: easy to access funds; no need to take money you don`t want; often interest free.

Cons: can be too easy (too tempting); can be repayable on demand; interest-free period won`t last forever.

Credit cards

Pros: easy to access funds; no need to take money you don`t want; low monthly repayments.

Cons: can be too easy (too tempting); often high interest rates; low minimum repayments mean it`ll take longer to pay off.

Student loans

Pros: low interest rate; no need to repay until you`re earning enough; low monthly repayments.

Cons: low repayments mean it`ll take longer to pay off.

Step 3) Careful how you pay it back

Nobody wants to pay interest. In general, the sooner you repay your debt, the less interest you`ll pay - and the better off you`ll be.

The exception to this rule is interest-free (or very low-interest) debt: As long as the inflation rate stays above zero, this debt will be worth less tomorrow - in real terms - than it is today. So it`s worth just paying the minimum towards this kind of debt, and focusing on repaying your other debts first. If you don`t have any other debts, it makes sense to put any `spare` money in a high-interest savings account, where it`ll pick up interest (in your favour), making it easier to focus on paying off this debt the moment its interest-free period ends.

Tags: debt, student, student debt, debts

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