Is a Student Loan a Good Idea?

           

There are many people out there that have done a degree using a student loan and are repaying it or have fully repaid it, but there are still lots of people that are really worried about getting a loan like this. Partly to blame is the media who portray the loan in a much scarier way than it should be and this leads to a misunderstanding of how it works. However, it is right to be cautious in some circumstances.

How does a student loan work?

A student loan is split into two parts. Any undergraduate that has not previously had a loan or student grant is able to borrow the money to cover the cost of their university course. If they come form a low income family they can also borrow enough to cover their living expenses and everyone is entitled to some money towards this but those from wealthier families will not get so much. This means that all students are entitled to some sort of a loan.

The loan will only need to be repaid once the student graduates and is earning over a certain amount of money. This amount changes with inflation normally and the amount they repair is taken out through tax in their tax code. This means that if they are a low earner they pay back nothing but if they earn a lot they will make small repayments on the loan. These repayments are made over 30 years and after that time any loan that is still outstanding is written off. These rules could change, as they have done over the years, but at time of writing that is how things work.

Should I get one?

This means that a student loan is low risk. Not only are repayments affordable but you may not even have to make them if your earnings are low. It also does not show on your credit report and so does not matter when you are being judged for other loans.

However, it is still worth contemplating a few things. Firstly, you will only get one loan. This means that it is important to be really sure that you are happy with the course that you have chosen. If you change your mind and want a degree in another subject, you will need to pay for it yourself and will have very different lending options. There is a chance of a loan still with repayments only starting when the course ends but the interest is likely to be higher and you will have to repay all of it. So choose really carefully.

There is also a thought that because students are now paying for courses, they should be more careful about what they choose. There has been a move towards courses that lead to specific careers rather than courses in things like the arts where careers are less obvious. This should not really be a factor though because as long as the course leads towards a career that they want to do it doesn’t matter what they study and only having one chance at a course was true when there were student grants rather than loans so nothing has changed there. Obviously, it is still worth having a good think about what you want to do but do not stress out too much over it.

It is good to think about how you might feel about a loan though. Some people get really stressed about being in debt. When they get their student loan letter which tells them how much they owe, they can feel anxious about where they will find all of that money form. It is easy to forget that they will not even have to repay it all necessarily. In fact, only 25% of students repay all of their student loans anyway. Another worry can be increases in interest rates but this will only impact those that repay the whole loan as they will also repay the interest. Those that do not repay it all will probably not even repay what they borrowed let alone the interest. So, it can be good to try to reassure yourself that it is not something to get stressed about. However, you will know what you are like and whether it is likely to have a negative impact on you or whether it is something that you will be able to easily manage.

Often parents will worry about their children entering the workforce with a debt behind them already. However, if you think of it as a graduate tax scheme rather than a loan, where graduates are taxed extra to pay back the cost of their degree, if they can afford it, then it does not seem so scary. There is also no evidence to suggest that if someone has a student loan that they are any more likely to struggle with debt in later life.

Should I Borrow Money from my Parents?

Borrowing money can always be difficult for some people. It could be because they do not like borrowing or because they have difficulty borrowing due to their credit rating or struggle to repay it. There are many borrowing options but for those that have difficulties with it, those options might be limited. This means that there are some who might feel that they should turn to their parents for help with a loan. However, it is worth thinking this through well first.

Will it impact your relationship?

It is good to start by thinking about whether it might have an impact on your relationship with your parents. When they lend you money it could cause a difference between you that you have not experienced before. This could be for all sorts of reasons, but money can be quite a sensitive issue and can often be the source of arguments in relationships. If you have borrowed from them before and all was fine then should be more confident that it will work this time. You will also know what they are like and whether it is likely to have an impact or not. It is worth thinking about this though as you do not want to fall out with them as it could be something that you really regret in the future.

Will it cause jealousy?

It can also be wise to think about whether it will cause any jealousy. This could happen, particularly with siblings if they feel you are being treated better than them. Money can be something which siblings are often jealous of and if they think that you are getting special treatment because of you being lent the money, they might take it out on you. They may want a loan themselves and if there is nothing left for them, then they might feel really angry towards you because of that. It could have a big impact on your relationship with them. You might regret falling out with them over something like this. It could even be a situation that your relationship never recovers from.

Will it leave them short?

It is also a good idea to think about whether it will leave them short of money. You could feel extremely upset if you borrow money form them and then it means that they have to go without things as a result. If it means that they have to cancel holidays or not buy gifts or perhaps even be really frugal with everything that they buy then this might make you feel bad. It could therefore be a good idea to think hard about whether you know what their financial situation is and whether you think they will manage. It could be the case that they will want to do anything they can to help you and so even if they cannot really afford it they mat lend you money and then this could be problematic for them and this is not something that you would want to happen.

How will you repay?

It is also important to think about how you will repay the loan. With a normal loan you will have a repayment schedule and repay a certain amount a month and also pay interest and possibly other fees as well. You will need to think about whether you want to set up an arrangement like this between you. It might help you feel better at borrowing if you know that you have a plan for repaying. You also need to discuss with them how much they want to charge you for borrowing form them. They may not want to charge anything but you may feel that you want to at least compensate them for the loss of interest that they would otherwise have got if they had put the money in a savings account. It is important to discuss all of this before you borrow the money and then you will be less likely to get into disagreements about it in the future.

It is a big decision to make and therefore you should spend some time thinking about it yourself and then discussing it with them. It is a good idea not to just go forward with it without properly thinking about the consequences. Discuss with them what might happen if you cannot make repayments or they need money more quickly than you can repay it. Make sure that you have covered every eventuality and then you will be able to be confident that it is the right choice for you. It might even be wise to have other members of the family present, such as siblings, so that they can express any worries they have about the situation and then you can get all concerns out in the open before anything is formally agreed between you.