Wealth Check: Working student wants to be debt-free

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The Independent Online

Sam Cooke, 26, works in the university sector and is a student. As well as her job as a research administrator, employed by a subsidiary of the University of Manchester Institute of Science and Technology (UMIST), she is also taking a part-time master's degree at the nearby Manchester University in educational research.

Ms Cooke, who lives in Manchester, is moving from a room in a shared house to a house shared with another friend. But she would like to buy a property.

She also wants help with making her finances stretch further. Her rent will go up, and she will also have to start repaying her student loan in April.

And Ms Cooke would like to start setting aside savings. She has a personal loan and a student loan, one credit card with £100 owing and a second, from Tesco Personal Finance, with £500 owing.

She would like to shop around for a better credit card deal, and possibly her loan, but she is worried that "card surfing" could damage her credit rating. "I never have any money left at the end of the month, after the loan repayments," she says. "I am worried about paying back my student loan, on top of my other loan."

We put her case to Elliot Nathan, of Bradford and Bingley, Mike Metcalf, of the Metcalf IFA Consultancy and Fiona Price, of Fiona Price Partnership.

SAM COOKE, 26, RESEARCH ADMINISTRATOR

Occupation: University research administrator, part-time master's student

Education: Psychology and neuroscience, Manchester University

Salary: £21,500 a year

Debts: £5,000 student loan; £5,000 NatWest personal loan

Savings: None

Pension: Workplace contributory pension, paying £30 a month (employer pays £130)

Outgoings: Rent for house share £300 a month. Travel £60 a month. Bills £60 a month. Phone bills £100 a month (£70 for mobile). Going out and food: about £400 a month. NatWest loan repayments £230 a month.

SAVINGS AND DEBT

Mr Nathan says: "Sam should concentrate on clearing her debts before thinking about saving. The loan with the Student Loan Company is likely to be at a very good rate of interest, so there is no point in moving this anywhere.

"But the loan from NatWest may not be at the most competitive rate." Mr Nathan says rates start at 6.5 per cent, significantly lower than the 10 per cent Sam now pays. She should investigate whether there are any redemption penalties before making a switch.

Ms Price agrees that Ms Cooke should concentrate on paying off her debts first, then start saving. She suggests Ms Cooke should, after her debts are cleared, divert the money she was paying back into a savings account. She recommends a cash Isa as an ideal tax-free, short-term savings vehicle.

CREDIT CARDS

Ms Price says credit cards are usually the most expensive way to borrow, and recommends Ms Cooke should pay these off first. She might be able to switch her balance to a card with a low introductory rate.

"After the cards are cleared, cut them all up, except one if you really need it," Ms Price says. "Then, make sure the credit limit is reduced. If you are not good at keeping credit card balances under control, you should have a limit that covers only what you need to spend on it for a month."

Mr Nathan agrees, but cautions Ms Cooke to be careful if she puts new spending on a new card; lenders might offer an attractive deal for balance transfers, but often charge higher interest rates for new purchases.

SPENDING

Ms Cooke will need to cut her spending if she is to meet her loan repayments or start to save. Her phone bill, and especially her mobile bill, could be cut back easily. Mr Metcalf says: "She could slash her phone bills. Her mobile tariff could possibly be changed to one more suitable for her, which may change her habits. Maybe she could get her friends to call her, or use texting more often."

Mr Metcalf also suggests Ms Cooke could try to cut her bills for going out and food by 10 per cent each month, which would bring her spending down to a much more manageable £250 in just five months. Ms Price suggests Ms Cooke records all her spending for three months, to see where the money really goes.

PENSION AND INSURANCE

Ms Cooke has good pension arrangements in place. But Mr Metcalf suggests she should check whether she has unemployment cover for her loan, and she could look at permanent health insurance (PHI) to provide income if she had a long-term illness.

BUYING A HOUSE

Mr Metcalf says that based on Ms Cooke's present salary, she could buy a home for between £60,000 and £70,000. Buying with another person might be more realistic.

Mr Nathan says Ms Cooke is likely to need a 100 per cent loan to buy, but this would mean that her mortgage payments would be more than her present rent, so she would have to make other savings.

The good news is that lenders increasingly base mortgages on affordability rather than strict salary multiples. One option Ms Cooke could consider, Mr Nathan says, is a mortgage for 120 per cent of a property value, from Northern Rock. She might be able to use this to consolidate all her loans in one place.

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