A graduate guide to post-university budgeting

This April ushered in a welcome change for graduates in England and Wales when the student loan repayment threshold increased, meaning that those who took out loans after 2012 can now earn more before starting repayments.

Previously repayments kicked in when earnings reached £21,000 per annum, but from April 2018 the threshold is now £25,000. The difference for graduates is up to £360 a year.

But graduates still carry the debt burden from studying in one of the most expensive university systems in the developed world.

A double whammy of high fees – which were trebled to £9,000 in 2012 – and large maintenance loans that replaced maintenance grants are to blame. Students from lower income backgrounds, most in need of maintenance loans, will therefore graduate with the biggest debts.

The average student debt is now £50,000 and interest at 6.1 per cent starts as soon as students receive their first payment. The Institute for Fiscal Studies says that the average student will have racked up £5,800 in interest alone before they’ve even graduated.

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Required reading: ‘Ensure students have the money to live’

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Additionally, interest rates on student loans are set to rise to 6.3 per cent from September 2018, as a result of the rise in the retail price index. The fact that student loans are linked to RPI and not the typically lower consumer price index has long been viewed as inappropriate given that the government uses CPI for calculating the rate of increase to both pensions and benefits.

However, because of the way that student loans are repaid – based on earnings and not the amount accrued – the total debt figure can be largely ignored.

Graduates repay 9 per cent on any amount of their annual income that goes over £25,000, no matter what they borrowed while studying. For example, a graduate earning £30,000 will repay 9 per cent of £5,000 – the equivalent of £37.50 a month or £450 per year.

Any unpaid debt is wiped after 30 years and the IFS estimates that 83 per cent of graduates will never pay back the total amount that they borrowed plus interest. Only the highest earners will repay in full.

In short, graduates may never pay a penny back, or they may clear the total debt, but either way, their annual repayments will be a small percentage of their income and will only need to be paid for a maximum of 30 years.

This means that the psychological connotations of “being in debt” are worse than the financial reality. Those who can think of their student loan not as a debt but as a contribution for an investment in their futures may start feeling better about it.

That said, loan repayments still make a noticeable dent in monthly graduate pay packets, so budgeting carefully and saving into a rainy day fund, are advisable.

Top tips for graduates faced with paying student loans for the first time

• Budgeting isn’t just about making sacrifices, it’s an organisational tool to help you avoid the build-up of debt. It’s better to budget with the money that you have than borrow and pay back later with added interest. So first work out what you can afford, then tailor your life accordingly.
• Draw up a monthly budget based on how much you have left after outgoings have been subtracted. Income tax, your student loan repayment and pension contribution will be taken automatically from your pay.
• The biggest outlay after graduation tends to be the deposit for private rented accommodation – typically one to six weeks’ rent upfront – the added fees charged by letting agents, and the cost of furnishing your new home, so it can be wise to save as early as possible.
• Building up a ring-fenced but easy-access “rainy day” savings fund provides both a financial and psychological safety net, which can be a huge comfort in the face of job insecurity,  unforeseen costs, or an unusually expensive month. As soon as you’re paid, put 10 per cent of net pay away – don’t wait until the end of the month.
• Save into a second, more impenetrable, savings account or stocks and shares ISA for the longer term, and make the most of your employer’s pension scheme. Even with relatively low interest rates, savings invested wisely can mount up over time.
• Never, ever be too scared to check your bank balance. Keep an eye on your accounts and use a budget planner to track income and outgoings. 

Sophie Phillipson is the co-founder of HelloGrads, an advice website for graduates 

Read more: Top five apps for managing student finance