You came, you studied, you borrowed. Now what?
You came, you studied, you borrowed. Now what? It used to be that the US took the spotlight when it came to the burden of student loans. But in recent years, other countries have made changes to their university loan systems — or methods of repayment — and now people all over the world face the post-uni debt dilemma.
In the UK, starting in 2012, universities were allowed to charge up to £9,000 ($11,987) per year for tuition fees, so some students are now graduating with tens of thousands in debt. In Australia, the government recently passed legislation requiring expats to make payments toward their student debt — the first time that’s been obligatory since 1989. In New Zealand, the government has started arresting people who haven’t paid their student loans. And in the US, students are now graduating with an average of $37,172 in student loan debt, up 6% from a year prior.
“Student loan debt is a big issue in the UK,” says Helen Saxon, chief product analyst at UK site MoneySavingExpert.co.uk. “Recent figures showed that English graduates on the new student loan system have the largest average debt in the world at £44,500 ($59,269).” There are large differences in other parts of the UK, however — Welsh graduates owe an average of £19,000 ($25,306), and Scottish grads face an average of £9,400 ($12,520)
How you tackle your student loan debt will depend on where you’re located. For instance, in some countries it makes sense to try to pay debt down early, while in others that’s not the case. Here are some strategies for handling that large educational debt balance you’ve amassed.
What it’s going to take: You’re going to need patience, fortitude and the stomach to wade through forms and fine print. Depending on where you live, there are different repayment options, tax requirements and rules. So you’ll need to stay on your proverbial toes and be prepared to take a hard and close look at your best options.
How long to prepare: You’ve got your university career to get ready for the student loans that will follow it, because in most cases you’re not required to start repayments until you graduate, and in some cases reach a certain income threshold. If you’re still in this phase of your life, take note: Try to borrow as little as possible.
“Working during holidays or in the evenings is a drag, but taking the YOLO (you only live once) approach to debt can make repayment really painful and get in the way of other priorities you have after uni, such as thinking about the property ladder,” says Holly Mackay, founder and managing director of UK site BoringMoney.com.
Do it now: Research your choices. In the US, there are a variety of ways to adjust your student loans, from income-based repayment to consolidation to refinancing — but you have to be your own advocate.
“Most of my clients aren’t right out of college, I have a lot of 30-somethings who don’t even look at what they have,” says Mark Struthers, a financial planner in Minnesota in the US. “They just blindly throw money at their loans, and if they’d addressed it, they might have more cash flow or be able to pay it off more quickly with some of the options out there.”
Income-based repayment options make it possible for you to lower your monthly payments if you’re not making much money — helpful if you’re just scraping by. There are also options to have portions of your loans forgiven if you work in teaching or public service jobs. The Federal Student Aid office has good information, as well as IBRInfo.org.
Consider staying local. In New Zealand, student loans are interest free if you stay in the country after graduation. Leave, however, and your debt will incur interest (currently 4.8%). And if you don’t pay or contact the Inland Revenue Department (IRD) to make arrangements, you run the risk of being arrested when you try to return, says Rod Mudgway, a financial advisor with Brackenridge Financial Solutions in Auckland, New Zealand. “This has been happening.”
Be patient. In the UK, once you make enough money to start paying back your student loans — enough deemed to be £21,000 ($27,970) a year in England and Wales — the government will start taking 9% out of the income you make over that amount through the UK tax system. (If you make £30,000, for instance, you’ll be paying 9% of £9,000, which is the excess over £21,000.) “So it’s repaid almost like a tax,” says Saxon.
Consequently, however, at this low payment rate and with high student loan balances, you might never pay your loans off. But, after 30 years, the UK forgives the unpaid balance.
“With the old system, where tuition fees were lower, many people did move to pay it off early, as they knew they would pay it off at some point, and it might as well be sooner to cut down on interest,” Saxon says. “But with the higher fees brought on in 2012, most people know they’ll never pay it all off, so overpaying is money down the drain.”
But consider paying early. Some loans in the US may carry an interest rate as high as 6.8% — or higher if you have a private loan. In Australia, the average interest rate for a university loan is 8%. If you’re not able to consolidate, refinance or otherwise lower the rate you’re paying on your debt, paying extra toward the balance will save you money over time.
Think about refinancing. One of the newer options in the US is the ability to refinance your student loans — meaning combining them all into one loan with one monthly payment, often with a lower interest rate. A word of caution: If you have federal student loans, refinancing means you lose the flexibility that accompanies those loans.
“You might lower your interest rates, but you give up any of those income-based repayment options,” says Wes Brown, a financial planner in Tennessee in the US. “That’s not always the best move. It’s really important to look at your options carefully before you do that, because it can’t be undone.”
Private loans don’t come with the same flexibility, so refinancing those isn’t as risky. You’ll need a good credit score to make refinancing happen. Consolidation is also an option, depending on your situation.
Pay attention. If you’re travelling the world and not paying much mind to your student loan balances, you could miss changes to your payment requirements — as evidenced by Australia’s recent legislation. “We’ve been recommending clients prepare for the introduction of the new laws next year by working out a rough calculation of what their student debt repayment may be,” says Brett Evans, managing director of Atlas Wealth Management in Southport, Australia. “By doing this, they have 12 months to put aside funds so that when the bill arrives next year, they have the cash ready and available.”
Do it later: Look at the big picture. Having a student loan hanging over your head can feel claustrophobic. But that doesn’t mean you should tackle it aggressively if there are other financial eggs in your basket.
“Make sure that you look at all the debt you might have and pay off the most expensive debt first,” Mackay says. “There’s no stigma to having a student loan, and if you have higher interest rates on anything else, get rid of that first.”
This article originally appeared in a interview with BBC Capital.