Degrees, temptation and debt

As you read these words, young people up and down the country are gearing up for one of life’s key events. They are poised to leave the family nest – which comes with home-cooked meals, free electricity and even the odd bit of entertainment thrown in – and head for university.

Of course, they have been doing this for generations. It’s all just part of the normal developmental process. Except that this year, they will be doing it against the backdrop of the worst cost-of-living crisis we have seen for decades… which is why financial literacy and the ability to budget are more important than ever before.

Our CEO Petronella West has two children at university and knows all about the issues they are facing. This week, she talks about some of the good habits they will need to pick up.

In the eyes of the law, HMRC, the FCA and numerous other bodies, you are an adult at 18 years old. You can drink alcohol, have a credit card… and engage in a plethora of exciting activities. But the truth is, there are significant gaps in what students and other young adults know about money and finances in general.

Challenger banks like Monzo and Revolut offer numerous features and functions that provide students with an eye-catching overview of their spending, and colour-coding transactions by category to help them budget and manage their finances more effectively. But at the end of the day, the go-to source for financial advice and guidance remains… their mum and dad. What do you need to know as parents about the three-or four-year period that lies ahead of them, and the various financial challenges it will bring?

For the vast majority of students, university life is an endless series of opportunities for personal and intellectual development. It is the period during which they will grow and flourish more than at any other time. But the harsh reality is that for many, it is also the start of a long, long period of being in debt: a period that starts practically on day one.

Let’s start with the most obvious component of that mounting debt: tuition fees. Students beginning courses this September can expect to pay £9250 per year. So a four-year course can set them back £37,000. And that doesn’t include the price of things like textbooks, course materials, travel to work placements or photocopying. Tuition fee loans are of course available, currently charged at a rate of 6.3%… and interest starts being added to the student loan from when the first payment is made. To give you a general idea, the cost of borrowing that amount over 30 years comes in at around £19,000. Assuming that interest rate remains unchanged – and that is an assumption that absolutely no one can make at the moment. How many graduates can afford monthly repayments of around £230?

While at university, they will need to live somewhere, eat, and clothe themselves. They will want a mobile telephone and gym membership. And all of that socialising and personal development will most likely happen against a backdrop of alcohol-fuelled revelry. Student Union bars may be heavily subsidised, but to every student’s disappointment, the beer is cheap... but not free. In short, it all adds up.

Maintenance loans are available to cover these costs – up to £9706 for students living away from home outside London, and up to £12,667 for those in London. Needless to say, interest is charged on these grants. The exact amount and when they have to start repaying it will depend on how much they earn after graduation.

Some university courses incur significantly higher expenses than others. But the long and the short of it is that students can expect to start their working life with a millstone of debt around their necks. The forecast average debt among the cohort of borrowers who start their course this year is £47,800 by the time they complete their course. There are, of course, ways to avoid having to repay that debt. Unfortunately, most of them involve keeping one’s earnings below a certain threshold.

The challenges begin relatively early on. For students who apply for maintenance loans, the money is paid into their bank account at the start of every term. And for most of them, this amount represents more money than they have ever had in their bank account in their entire life. Immediately, they find themselves having to learn how to say no to what they want and yes to what they need.

And doing so means learning how to meter out that maintenance grant lump sum over the whole term or semester. It means not giving in to peer pressure and sometimes saying no to socialising or doing without the Nike trainers or Urban Outfitters coat they have been coveting. And it means avoiding the numerous temptations with which young people’s paths are so frequently strewn – such as low-interest overdrafts and store cards (the terms and conditions of which are notoriously lacking in clarity and which charge APR of up to 29%).

Being a student frequently means learning difficult lessons in life. They may have put down a £1000 deposit on off-campus accommodation in their second year, but the chances of their seeing that sum again in its entirety are slim – unless they have a very reasonable and fair-minded student landlord or are somehow able to break with time-honoured student tradition and take scrupulously good care of where they live.

Mixed housing – in the sense of accommodation in which both students and non-students live – also brings with it certain challenges: council tax is payable by anybody in the household who is not a full-time student, and that person would need to pay it for the number of people in the house.

Banking apps nowadays feature numerous money management functionalities. Students can track how much they have coming in, how much they are spending and how much (if anything) they are saving. Learning how to budget during their teenage years will stand them in good stead for when they have to fend for themselves at university.

Financial literacy begins early on in life. Young people need to be encouraged to make smart spending decisions.

For them to learn how to make decisions about using money, they need to practise on some of their own before they go to university – when the stakes are not so high.

By giving them a monthly allowance right from an early age, they start learning to live within a budget. In many households, teenagers are constantly heard clamouring for money, before spending it without giving any thought to the effort that went into earning it. But paying them an allowance and telling them that they have sole responsibility for managing it will get them into the habit of making sensible decisions… a habit that they will take with them when they head off into academia – that intermediary place between the soothing comforts of the family nest… and what we oddly refer to as “the real world”.

When your children are young, try to embody the financial behaviours that you would like them to adopt. If you want them to get into good spending and saving habits, it is important for them to see you making sensible spending and saving decisions. In other words, be sensible, avoid profligacy and defer gratification.

Practise what you preach. And do so with consistency. Teaching your children to be financially literate can take time. But if you communicate consistently and continuously, they will pick up good habits that will serve them well in the long term. The result is that they might not be quite so saddled with debt by the time they finish their degree.

You might even consider bringing them along with you next time you check in with us at Investment Quorum.