There are still many people that worry that a student loan can then load to problems in the future with borrowing. Although this could be the case, there are many reasons for assuming that it is actually quite unlikely to make a significant difference. It is hard to produce hard evidence for this, but there are some factors which are worth thinking about that might help you to understand more about how a student loan works and why it might not necessarily lead to debt problems.
Differences between grants and loans
Many parents of teenagers would be used to the grant system for university. This is where all students had their fees paid by a grant and then were awarded a maintenance grant based on the household income that the student lived in and if the family had more than one child at university at a time they automatically got a full grant. This meant that higher income families would have to finance their own children for the costs of living away from home.
When the loan scheme came in it was changed a few times initially but now is set up so that all families can borrow the amount needed to cover the course fees but any extra they need to cover living expenses is based on the household income but no allowance is made if two children are at university at the same time. So, there are a lot of similarities in the way that the amounts awarded are given, it is just that the money is leant to the student rather than being given to them. Higher income families still get less and would have to find their own way of covering the cost of living expenses.
How loans work
It is worth making sure that you have a good understanding of how the loans system works. With grant system nothing needed to be repaid, which is obviously different to the loan system where repayments do have to be repaid. However, loans do not have to be repaid in full or repaid at all as whether repayments are necessary is based on what the graduate is earning. The repayments are means tested, based on what the graduate is earning and once they pass a certain salary threshold, they will need to start paying back some of their loan repayment within their tax code. This means that it will be taken out automatically when they get paid. They will not even have to think about it and it will have no impact on their credit record.
This is very different to standard borrowing where you have to repay everything you owe, make repayments regardless of your income and it will affect your ability to borrow other money. The student loans are also written off after thirty years which means that some students may never repay anything if their earnings are not high enough. A majority of students make some repayments but not all of them and this means that many will repay some of what they borrowed by not all of it and no interest.
Loans and debt
It is worth therefore thinking about whether having a student loan could lead to debt as it works in a very different way. The student loan, although called a loan is not really a loan. In many countries where they have a similar scheme they call it a student tax scheme or something similar. There might be problems associated with being a student and not having a lot of money which could lead to students borrowing, perhaps on a credit card or something like this. This is not a direct result of having the loan, but a result of not having a high enough loan, so they need to find money elsewhere as well. It may mean that some students are forced to get part time jobs while they study rather than them having to get into debt.
It is hard to see how having a student loan might cause students to get into more debt. The loans are very different to other loans and they are a good form of borrowing which will enable them to earn a higher salary as a result. The name ‘loan’ which they are given might have an influence in that it is a relatively easy way to borrow and repay money compared with a traditional loan. It is possible that they might therefore assume that all loans will be this easy to manage. However, it is hoped that most graduates would know the difference between the way a student loan and conventional loan works. The loan and the concern about borrowing money might even make student reluctant to borrow more money as they know that they already have a responsibility to repay one loan and so they may not be keen to take on others, particularly without much consideration.