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The prodigal son

My son is due to graduate from university later this year and I am conscious of the fact that he is likely to have incurred a considerable amount of debt. I am keen to help in any way I can, both with advice and financially, if possible, but I am unsure where to start. Could you give me some pointers?

Reports on the increasing level of student debt are sadly frequent and recent figures from the National Union of Students suggest that the average debt on graduation is £12,000 and rising every year.

Such debts will typically consist of a mixture of overdrafts, credit cards and student loans. In addition, graduate loans are offered by many financial institutions to assist with the costs of embarking on a new career and/or to assist with consolidating existing debt.

It is highly likely that student loans will comprise the biggest part of your son&#39s overall debt. You might be surprised, therefore, that I would suggest that this should not be the main area of concern as student loans do benefit from extremely low rates of interest – indeed, the rate is designed to be equivalent to the rate of inflation so that, in practice, no student repays more, in real terms, than they originally borrowed.

In addition, repayments are calculated in relation to a percentage of earnings rather than a fixed monetary amount and will only be due once income exceeds £10,000 a year. That said, the management of debt is very personal and, while there might be good financial reasons for not addressing this debt first, I do understand that, as the biggest debt, it might be of more concern to you. More detailed information on student loans, including repayment, is available at

You will need to consider the different rates of interest that your son is or will be paying on the various debts accrued to date. The simplest way of doing this is to compare the annual percentage rates payable on credit cards and overdrafts. These are likely to be lower than standard rates as beneficial terms are often offered in an attempt to attract students as customers and, indeed, in the case of overdrafts, it is possible that these might be offered at a reduced rate or even nil interest during the period of your son&#39s study.

Your son will need to ascertain the exact terms of his overdrafts and it is vital that you understand from what point in time any beneficial arrangements such as interest-free overdrafts cease and the terms that would then be imposed.

You do not say to what extent you would be willing to assist your son but I would suggest that it is highly likely that the credit cards will be subject to the highest rate of interest. Look to clear these debts as quickly as possible and consider carefully whether the features of the cards that were attractive to him as a student are still relevant when considering his anticipated use of the cards in the future.

A package may be offered that incorporates redemption of an overdraft in full or part through a graduate loan. Your son will seriously need to consider whether any extra funds are required to pay for a car for his new job or to assist with the costs of relocating to another town or city from his place of study, for example.

Is the offering through the graduate loan comparable with the terms offered through other arrangements. You will also need to compare the APR on the graduate loan with the rate charged for the overdraft.

If a graduate loan is taken out, you should be familiar with how an early repayment figure is calculated if you or your son has the funds at a later date to redeem the loan earlier than intended. Are any penalties imposed?

Alternatively, could you personally afford to meet the costs that the graduate loan would be intended for? Where would the money come from to meet these costs? This is highly relevant because, if the money is coming from a source where the return being achieved is lower than the rate being charged to lend the money, then this would seem a sensible and prudent use of your money.

However, caution should be exercised if the source of any funds is an investment where penalties are applied for encashment or that might give rise to a tax liability.

Similarly, an encashment of any equity-based investment, given the current environment, would also require careful analysis.


Julian Gibbs

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