Student Finance: where, how and repayment?

Today we have a guest post from the wonderful people at Consumer's Advocate. Raul Menendez, one of their Outreach Team members shares some advice about student loans, talking about government vs private options and also the 3 ways to repay them. With many starting university for the first time next month, this couldn't come at a better time. Also, this relates to United Kingdom (UK) and United States (US) studies only.

The world is a hectic place, and sometimes we just need a little financial assistance. But loans means more debt, and after learning that most of our parents, siblings, friends, and neighbours are still paying off their student loans, the question ends up being, "are private student loans really worth it?". Before we get to that, let's go over a few misconceptions about student loans. 

Loans are not free money. The research team at Consumer's Advocate have realised that the real issue in the student loan industry isn't misinformation, but lack of education regarding student loans and interest rates. Paying off loans is possible. For those of you knee-deep in student loan debt, there is a definitely a light at the end of the tunnel. 

In general, student loans are funds borrowed to finance a student's post-secondary education, which includes tuition costs, accommodation, books, class materials and additional living expenses, like food and transportation.

In both the UK and the US, students who attend education post-secondary schools can apply for loans sponsored by the Student Finance (England, Wales, Scotland etc) aka the government, or for the latter, the federal government, guaranteed by the U.S. Department of Education. These are recommended as the first option to fund because the student's credit history and score do not factor into the loan approval process, instead it is a means-based assessment on household income.

Government student loans have multiple repayment assistance options, including income based plans, deferment, and for some, loan forgiveness programs, to help borrowers who have trouble making payments after graduation. The benefit for private student loans is that, usually they can cover the entire amount that the student borrower needs. Some private student loans work similarly to government ones, where private lenders allow loan deferment while the student borrower is still enrolled in school. 

Almost 40% of all adults under the age of 30 have a some outstanding student loan debt, and this is growing! 

It's beneficial to understand every aspect of the lending process in order to choose the best private student loan. Interest rates on private student loans tend to be higher than government loans. Interest on private loans begins to accrue as soon as the borrower receives the loan disbursement, which can be, problematic for some. Private student loans also tend to have more stringent qualification requirements.

What are the most effective strategies to tackle your student loan debt so you can get out there and start working on your financial freedom?
In-school deferment is a great benefit, so if your private lender offers it, take advantage of making early payments during that time. Eric, one of our web designers, testifies to this strategy. Eric told us he took out a private loan to help with the remaining tuition costs that his federal student loans didn’t cover. After comparing the interest rates with his federal loans, Eric realised that his monthly payment would multiply if he waited to pay back his private loans after graduation. Eric decided to buckle down on his payments early, in which he got a job that worked with his class schedule and minimised his living costs by finding a roommate. By doing these things Eric kept down the interest on his loan and was able to pay it off faster after graduating. 

Scholarships and grants aren’t restricted to just some students. It is advised that students continue looking and applying for grants and scholarships. Many students don’t know they can still apply for this type of financial aid when already attending and often miss out on many awards accessible to them. Keep looking, searching and applying!

The debt snowball method takes determination and discipline, but it's among the most effective for minimising and eventually eliminating debt. Popularised by personal finance author and radio show host Dave Ramsey, the debt snowball method is a debt reduction strategy where a person lists their debt from smallest to largest and makes the minimum payments on each one except the smallest debt, to which they apply any extra income. Once the smallest debt is paid off, the person moves on to the second smallest debt, and so on. The method is designed to help individuals stay motivated and prioritise payments to get out of debt faster. 

Thank you to Raul for sharing these tips and advise on student finance! I will defintely take the latter option on board, as I think it's a great strategy to repay loans simply. If you would like to learn more about student loans you can do so by reading about the best student loans of 2020 for the UK and US here. If you have any further advice or information, share it below.

From a personal point of view, I've financed my way through 6 years of university by Student Finance England (SFE), taking out my maximum amount. I found this a great and secure way to access money and support myself, whilst also minimising risk. I liked that it didn't contribute to my credit score and didn't class as a "debt" as such, when applying for mortgages etc. I also appreciated that payment would be taken almost as a tax, from my earnings over £26,000 and realistically, is never going to pay off in full, before being written off in 30 years. I also allowed SFE to share my data through the university and through that I have received 2 grants each year, throughout my time studying which has also helped!

I think it's really important to budget and especially as first year students, it may be the first time you've ever lived away from parents and family so it can take practice. You can also further support income through doing part-time work or even online schemes.