How to help students understand debt

Turning to borrowing money is one of the most common ways of plugging a financial gap between income and outgoings.  

Traditionally, the main reason people used debt was to buy a house or make some other long-term investment. While for some this is still the case, for many more the cost of living crisis is leaving no option but to take on shorter-term debt too, using different forms of borrowing just to cover the cost of everyday necessities. 

In addition, the digital payment space has adapted to meet the growing demand for credit facilities. Modern borrowing is now not only more accessible but available as a payment option for nearly every type of purchase! The methods of borrowing have evolved to allow people to ‘spread the cost’ for just about anything.    

For students left out of pocket by soaring inflation, turning to debt will be more tempting – and for some, necessary – than ever before. Figures emerging from our latest research show a concerning increase in students’ use of debt over the last 12 months:

• 23% of students surveyed (out of a total of 1,000) have used or considered using a Buy Now Pay Later service as a result of a lack of money caused by the cost of living crisis
• 16% have/have considered taking on a new overdraft (excluding a free student overdraft)
• 15% have/have considered getting a new credit card
• 9% have/have considered taking out a new payday loan – meaning the number of students using or considering using a payday loan has increased by a third since 2022

With that said, there are a few ways to think about borrowing money that are timeless and hold up just as well in the digital payment age as they did in the past. Let’s take a look at what these are, so you can pass them onto your students as general guidelines to help them understand and make informed decisions about debt.

Is there ‘good’ debt and ‘bad’ debt?

It could be tempting to simply separate debt into two categories: ‘good debt’ and ‘bad debt’. But when it comes to borrowing money, it is rarely that black and white. 

For example, where borrowing for a mortgage may be a great investment for one person, for another, it could lead to significant problems if the monthly mortgage payments spread their finances too thinly and become unaffordable. 

The reality is that what’s a ‘good’ debt for one person might be a ‘bad’ debt for another – it all depends on the individual’s personal circumstances and finances. 

Therefore, if a student is considering borrowing money, it’s important that they treat each loan on a case-by-case basis and understand the considerations and implications of each.

What should students consider when dealing with popular methods of borrowing?

Different credit facilities carry varying risks and benefits. Put simply, credit facilities are another name for different forms of borrowing. 

When students are aware of these differences, they can make an informed decision on the best ways to borrow, should they need to.

Student overdrafts

The student overdraft is a popular form of borrowing. It can be a good tool to provide extra leeway when faced with rising costs and for students who simply don’t have enough income to cover their outgoings, it can be a necessity. 

The good points: 

• Interest-free – most student overdrafts come with a 0% interest rate, including those offered by Santander, HSBC and Nationwide.
• Regulated – all students applying for overdrafts will be given a full credit check and, based on the result, be given an overdraft limit. A good way to think about this limit is the maximum amount of money the bank (as the lender) can trust the student (the borrower), based on their credit history.

But as with any form of borrowing, there are important considerations too. For any loan with a 0% interest rate: interest-free doesn’t mean risk-free. If a student exceeds their overdraft limit, they’ll likely be levelled with late charges, and if they do so repeatedly, their credit score will take a hit. 

Students should also be encouraged to only use their interest-free overdraft if absolutely necessary. Although they might not be charged interest for using it, they will still have to pay back any money borrowed eventually. So the first port of call is always to spend within their means, if possible. 

On that note, it’s important students are aware that following their graduation a student account will most likely change to a normal account, meaning that in some cases the interest rate will no longer stay at 0%. 

Staff should encourage students to check if and when this change to the account is due to occur, so they are well aware and can try to plan to complete repayments in advance of this date. 

An added interest rate could quickly become a problem for a recent graduate who leaves university thousands of pounds into an overdraft, so it’s important they are given the right guidance during this transition.

Credit cards

Student credit card usage has been on the rise as more students turn to them to help manage the cost of living crisis.

The UK retail sector has reported seeing a spike in profits – just as people in the UK take on the highest levels of debt seen in 18 years. The important thing to consider is that credit cards are being used to buy goods with a wide range of value, from expensive electronic items to basics such as milk.

As basic items like food and non-alcoholic drinks stand just below energy bills on the list of items that have increased the most with inflation, these are the items that students may be taking on debt to be able to afford.  

Here are a few tips you can give to students to help them manage their credit cards, if they have any: 

• Pay credit cards off in full each month: To avoid interest charges, students will need to repay the money that they spend each month. In failing to do this, students will have to pay back more over time than they borrowed in the first place, even if they stop buying items with the card. 
• Stay within your credit limit: The limit is there for a reason, and if students exceed it, they will be charged a fee and risk damaging their credit scores. 

Share this blog with students: Credit cards: why just paying the minimum isn’t enough.

Lending schemes

Some supermarkets have reacted to the relatively recent trend of lending schemes and students will need to be careful to ensure they can tell the difference between lending schemes that are in and outside their budget. 

For emergencies, schemes such as Iceland’s minor loan scheme may be a good port of call. They offer interest-free loans of up to £75, so those in need can buy groceries and then pay the loan back in weekly £10 instalments. 

However, some of these schemes are to be approached cautiously. For example, Marks and Spencer offer a credit scheme with a limit of £500 – but only the first 45 days are interest-free. 

Again, making a choice comes down to a student knowing the difference between what’s good and bad debt for them after reviewing their own personal circumstances. 

We want to empower students with the knowledge to understand the implications of various credit facilities and be able to make an informed decision about which is the best option for them. For example, which is a good loan to go to in case they need emergency food supplies and which carries significantly more risk and is more an indulgence than an emergency package.

Buy Now Pay Later

For students, Buy Now Pay Later (BNPL) apps are a form of fintech that have increased in popularity as people have found common goods less affordable. The evidence would show that BNPL is most appealing to young people, with 80% of the average BNPL monthly debt coming from 18-24-year-olds. 

BNPL is now an option many digital payment services are using. For example, when using Apple Pay, students will now also be able to choose Apple Pay Later, allowing them an option to spread the payments for online and in-app purchases. 

Other businesses have followed suit, with BNPL apps like Klarna partnering with food delivery companies and clothing companies alike, making it easier than ever for young people to use debt to buy low-value goods. 

Due to this, BNPL not only appeals to cash-strapped students but can also be dangerous to those who struggle with impulse spending: 

• Small debts can quickly add up: Sometimes, because BNPL allows small loans of low-cost items to be taken out, it can be thought of as a safer way to borrow. However, this works on the assumption that those using BNPL will only have one active repayment running at any one time. On average, BNPL users are paying off 4.8 purchases simultaneously and keeping track of repayments can become difficult.
• A ‘soft’ credit check isn’t always a good thing: Regulation is still being written to keep up with the evolution of BNPL technology. Over a quarter of BNPL users are using BNPL instead of a credit card after having a credit card application refused. This puts students with bad lending habits in danger of accruing even more debt.

BNPL is neither inherently good nor bad, as is the case for debt as a whole. So for students, it’s down to how they use it and their personal financial circumstances.

Key debt questions to encourage students to ask themselves

Equipping students with the right questions to ask themselves before diving into the world of borrowing will help them to make an informed decision that’s right for them. 

Here are a few suggestions:

Am I in a position to borrow money?

A full credit check is a way for the bank to ask this question about a student, which will be done if a student applies for an overdraft or a credit card. But if they borrow money through more modern methods like BNPL, students should have a set of questions to make the judgement themselves: 

• Is it an emergency? 
• Have I considered all possible options? (including borrowing money from family)
• Is my current level of debt manageable?
• Have I been declined more entry-level forms of borrowing because of a bad credit score: like a student overdraft or credit card? 

Will this product’s value decrease from the moment I buy it? 

As a general rule, it’s rarely a good idea to spread the cost on an item that immediately loses value once you’ve bought it. Especially for items like clothing and takeaways.

Does this product carry an interest fee or a significant late payment charge?

Some BNPL providers and banks attract students by advertising interest-free loans. But it’s worth remembering that many will carry hefty late charges and can refer you to a third-party debt collection agency if payments are late. 

In the case of loans that do carry an interest rate, it’s vital students are familiar with the extra cost implications that could come with borrowing in the current high-interest environment. With interest rates rising, it’s worth asking whether it’s a good economic environment to borrow in at all, unless completely necessary.

How well-regulated is this type of borrowing?

Students should rank types of borrowing according to how much regulation they comply with.

In other words, if the lender asks fewer questions of its borrower, then the borrower must ask more questions of themselves.

Student debt

The student loan is the most common form of borrowing amongst students, but also one that can cause confusion. 

Our 2022 Student Money and Wellbeing report revealed an interesting divide between students who understood the repayment process and students who thought the student loan would need to be paid back immediately upon graduation. 

It’s important to continue to explain how student finance works to students at multiple points throughout their university journey. 

For students who don’t understand the process, it can contribute to worries about money, which in turn can have a real impact on their mental health. Especially for those students who are taking on other forms of debt because of the cost of living, they can see the student loan as an additional impending debt – leading to compounding money worries.

A different way of thinking about the student loan

When talking to students about the student loan, it can be helpful to view it more as a tax. Like a tax, repayment only begins once income has exceeded the repayment threshold, which in itself can be a sign that their degree was a worthwhile investment. 

Put simply: the student loan is ‘good’ debt because it’s low-risk while offering the student a likely return on their investment in the form of increased future income and prospects.

Further debt information and support for students

Support on campus

Lots of universities are doing a great job of providing additional support on campus in the face of the cost of living crisis which could, in some instances, be helping to prevent students from needing to borrow in the first place. Find out more about those here.

Check out 8 ways to support students with the cost of living crisis too.

Further resources staff can share with students:

• Citizens advice: Debt and Money
• Step Change: Debt charity
• Student Minds cost of living support
• The rise and risks of Buy Now Pay Later

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