Wealth Check: The student life is over, but the £28,500 debt isn't

How can one reader hope to buy a home or start a pension when £430 a month goes on repayments?
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The Independent Online

Although she is now 29, Ailsa Macfarlane still carries a hefty financial burden from her long-gone student days: debts of nearly £30,000.

On top of undergraduate debts of around £9,000, Ailsa, who lives in south London, ran up £7,000 on a credit card, £1,500 on an overdraft and took out a £10,000 bank loan.

"I'm deeply in debt: as a student in London, the capital was very expensive to live in."

But Ailsa, who earns £25,000 a year as a business account manager, is trying to get a grip on her finances. Three months, ago, she consolidated her credit card debt, overdraft and bank loan into one larger £19,500 loan with Lloyds TSB - repayable over eight years with an annual percentage rate (APR) of 7.5.

Ailsa pays back £250 a month on her bank loan. Add to this the £180 a month for her student loans, and she spends £430 a month servicing her debt.

"I am frightened by how much money I owe to Lloyds TSB," she says. "Over eight years, I know I have to pay £7,000 in interest alone - but this loan seems to be the only way I can manage my debts and still be able to afford to live and pay my bills each month."

Her debt mountain has made it impossible for Ailsa to build up any savings or make any investments. She has no pension savings either, and her employer, a small firm, doesn't offer an occupational scheme.

Since moving to London as a student nine years ago, Ailsa has rented accommodation. For the past nine months, she has been living with her boyfriend, Alistair. They rent a flat, each paying £475 a month plus bills.

"We've discussed buying together in the next couple of years, but I'm not sure how feasible this is," says Ailsa.

She has no protection policies.

The cure

Try to shorten the life of your loan

Ailsa's finances are ruled by her debt, says Philippa Gee of independent financial adviser (IFA) Torquil Clark. "All [her] spare resources need to be ploughed into repaying this, especially as she has so many plans such as buying a house and starting a pension."

Despite her position, Ailsa should try to find cash to fund a personal pension, says Ben Yearsley from IFA Hargreaves Lansdown. "Even if it's only £50 a month, the sooner she starts this, the sooner she can get tax relief and build a pension pot."

Debts

Eight years is too long, and expensive, a repayment plan on the consolidation loan, says Ms Gee. She suggests that Ailsa think about repaying these debts more quickly.

To do this would involve trying to renegotiate her loan - shortening its life and paying higher premiums - either with Lloyds TSB or another lender.

But there are caveats, warns Simon Webster from IFA Facts & Figures.

Ailsa could make enquiries at other lenders and find a better APR - some internet deals offer rates as low as 5.6 - and cheaper monthly repayments, he explains. But before transferring the debt, she would need to check the size of the penalty at Lloyds TSB for repaying her loan ahead of schedule.

Mr Webster also warns her to watch out for offers of payment-protection insurance from the lender. This can add thousands of pounds to the cost of a new loan - as well as carrying exclusions that may leave Ailsa unprotected.

Since her £9,000 student loans are not too expensive - with interest charged at 3.2 per cent - she doesn't need to worry much about these for now, he adds.

Property

Ailsa should forget about buying a home for the moment, says Mr Yearsley. "As she has large debts and no savings, I think it would be a struggle."

Ms Gee feels the same, although she suggests one option could be to go for a cheaper property outside London.

However, Mr Webster is more upbeat about the couple buying their own home - especially if family members can help with cash, a loan or a guarantee.

If they could afford £1,000 a month - roughly what Ailsa and Alistair are paying in rent today - that would cover the interest on a loan of more than £200,000, explains Mr Webster.

Several factors need to be considered first, though, he adds. "Whether Ailsa would be allowed to borrow that much - and whether it would be a good idea - would depend on their joint credit rating, how stable she feels her relationship is, her boyfriend's earnings and her own attitude to risk."

Savings

Mr Webster says that while Ailsa needs to concentrate on getting rid of her debts, a small "emergency fund" in a mini cash individual savings account (ISA) would be a "wise move".

He recommends she pay £50 a month into a Halifax ISA paying 5 per cent.

Retirement

Pension provision should be one of Ailsa's priorities, urges Mr Yearsley. "As a rule of thumb, you should put half your age in as a percentage of your salary."

He continues: "At the present time I don't think she could afford this, as that would be almost £300 a month. But she should look at putting something in - even if it is only £50 or £100 a month."

Since her employer offers no company scheme, her options are limited, but a stakeholder personal pension could be the cheapest, and most flexible, way to start saving. Available from insurance companies such as Norwich Union and Legal & General, these have annual charges of no more than 1.5 per cent. Ailsa can also take her stakeholder scheme with her when, or if, she moves job.

Every pound she saves attracts tax relief, helping to build a long-term savings pot.

Protection

As Ailsa has neither a mortgage nor dependants, there is no point in her having life insurance, says Mr Yearsley.

But critical illness cover and permanent health insurance may be worth considering when she has a bit more money to spare each month.

Interview by Esther Shaw

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