Is Student Debt Really Debt?

Lots and lots of young people, as well as some not quite so young ones, are getting geared up to start university next month. Lots of others ended their university days just a couple of months ago. Both starting and finishing a degree can make for exciting times, but one of the biggest downsides of getting a degree is generally considered the amount of debt you leave with – generally something in the order of tens of thousands of pounds.

But is student debt really debt, in the sense that we generally understand? Obviously it is debt in the simple sense that you owe money, but there are some very important differences from other forms of debt. Understanding these, and not treating student loans in the same way as any other debt, can potentially save you a lot of money in the years following your graduation.

Repayments

One of the biggest differences between student loans and other forms of debt is the way that repayments work. Repayments are taken automatically from your wages when you work with the option to make additional payments voluntarily if you wish, which makes things nice and easy. More important, though, is the fact that repayments are only taken when you earn more than a certain amount (currently £17,335), meaning that if you have not yet found a job after graduation, start off earning less than this, or spend any time between jobs then there are no compulsory repayments whatsoever.

Write-off

The most important difference for many is the fact that student loans can be written off – something that is rare for any other form of borrowing. More to the point, if you have not repaid your loan after a certain time (for England and Wales, this is 30 years after you become eligible to repay if your course started any time after September 2012), then it will be written off. This is a huge difference, and where a lot of people go wrong by treating a student loan like any other kind of debt.

The Real Difference

But what do this differences mean in practice? Well the biggest factor is the debt write-off after 30 years (35 in Scotland assuming your course started in or after September 2007). Many people treat their student loans as they would any other debt. With most loans, it is ultimately worth paying back more than the minimum if you can because your debt will be shifted sooner and you will accrue less interest. Working on the same logic, it is common for people to make voluntary extra repayments towards their loan or to make payments voluntarily when they are not earning enough to be required to make compulsory payments.

However, as many as three quarters of students may never end up paying off their debts in full before they are written off. This means that the majority of students, by making extra repayments, would simply the amount they repay at the expense of the amount that gets written off. In other words, they are effectively paying extra money.

Of course, this comes down to personal circumstances. If you think you are likely to end up paying off the full amount before it is written off, then the logic of any other loan applies and paying sooner will reduce interest. If not, however, then you are best letting your future self take full advantage of the write-off.

Can a Debt be Written Off?

In exceptional circumstances, it might be possible for a debt to be partially or fully written off. It is even possible that a creditor might cease all action against you. While this situation is rare, it can seem like a genuine godsend to those who find they are eligible.

Dealing With Debt

It is important to note that having a debt written off is rarely if ever a first option to consider if you are having trouble with debts. As it will only rarely be granted, you should first take every reasonable effort to manage your debts and your financial situation. Contact your creditors and see if they are willing to come to a more manageable repayment arrangement. Seek independent advice and come up with a debt management plan.

Lump Sums

Possibly, the easiest way and most common to get part of a debt that you are struggling to repay written off is to offer a lump sum. Unfortunately, most people who are struggling with debt will be unable to do this. However, for those that are, offering creditors a full and final settlement can be an attractive option.

If you are able to offer a lump sum which represents a reasonable portion of your debt, your creditors may be willing to accept it and write off the rest. It is, in many ways, better for them to accept less money but to get it immediately instead of slowly over a number of years, especially if your circumstances may lead to complications when it comes to repaying the full amount. If your creditors agree, make sure you obtain written evidence that the lump sum is all you will be required to repay.

Simple Write-offs

In very rare circumstances, a company may be willing to write off your debt completely. This will usually only happen if you have very little hope of repaying the debt. Not only will you have to be on a low income for a creditor to agree to this, but you will also have to be in a situation which means your finances are unlikely to improve. Most often, debts are written off for the elderly or people suffering from serious illnesses.

Individual Voluntary Arrangements

Many companies advertise a “government scheme” to help write off part of your debts. This usually refers to Individual Voluntary Arrangements (IVAs). While IVAs are genuine, they are not as simple or pleasant as the adverts would suggest. For several years, every bit of spare income you have will likely be paid towards your debts. You may also be required to sell valuable possessions. However, if you are in a very difficult debt situation this can still have some definite advantages. After the amount you agree when the IVA is taken out has been paid, the remainder of your debt will be written off and you will be debt-free potentially much sooner than you would have been otherwise.