Bankrupt: 4,000 students declare bankruptcy - and many more unable to clear debt

And, like Laura Schwartz, they don't know where to turn, as rates of insolvency and stress counselling soar. Marie Woolf and Sophie Goodchild report
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Record numbers of graduates are declaring bankruptcy because they cannot repay their loans. The Student Loans Company, which handles the financing for the Government, says more than 4,000 of its borrowers have declared bankruptcy, with 3,486 still insolvent.

In London alone, 68 graduates who took out student loans declared bankruptcy in 2004.

MPs warn that student debt is now a national crisis and teenagers will be put off university. Paul Farrelly, the Labour MP for Newcastle-under-Lyme, said the figures were a disincentive for those from poorer families. "What's really concerning is that debt might put off youngsters going to university."

The level of student debt is also expected to increase when top-up fees of up to £3,000 are introduced this year.

Edward Davey, the Liberal Democrat education spokesman, said: "Mounting debts are being hung round the necks of students like millstones and it is shocking. These young people are starting their careers with one arm tied behind their back."

Laura Schwartz is among this new breed of debtor, middle-class and well-educated. There are an esti- mated 138,000 of them falling behind with bills or risking serious difficulties.

Ms Schwartz, 23, agonises over how she will pay the £15,500 cost of her history studies. She says: "I've spoken to students who are considering bankruptcy and maybe that would not be such a bad idea."

The average debt owed by those in higher education has also soared in the past decade, from £3,400 to more than £12,000. Counsellors warn that they risk of mental illness and psychological trauma because of facing such a financial burden at a young age.

In some cases, they have even been driven to suicide because they see no way out. Lisa Taylor, 26, hanged herself last July at her father's home in Blackburn, Lancashire, because she was £14,000 in debt. At the inquest, the coroner revealed a bundle of letters to her demanding repayment.

The National Union of Students says unprecedented numbers of students in higher education are seeking counselling to solve not only their credit problems but the psychological stress of coping with debt.

"Being in debt is stressful, and of course it takes a psychological toll," says David Malcolm, a policy officer for student finance at the NUS. "Debt does that to anyone. It's particularly bad for students because they are not earning money to pay it back."

The days when students could manage on a maintenance grant are long gone, and parents are having to spend thousands a year - the average is £4,500 - to keep their children clear of financial problems.

Under the present system, graduates have to start repaying when they are earning more than £15,000 a year. The Student Loans Company seeks 9 per cent of the excess earnings.

Even if students do declare themselves bankrupt, they still have to repay their loans under guidelines introduced in 2004, which state these remain the responsibility of the student.

Ms Schwartz, who lives in student accommodation at the University of East London, has to juggle casual jobs, including bar work, with her studies to keep her head above water.

"It's frightening, and such a massive burden to have at the beginning of your working life," she says. "It means people will have to try to get jobs that pay lots, not necessarily the socially responsible jobs they really want."

The Government gave Ms Schwartz loans of £4,000 for every year at university and a £500 hardship loan she applies for every year. With a £2,000 overdraft, she says she cannot even afford the £30-a-month interest on her loans.

"It hits the poor," she says. "There's a real danger of university turning into enclaves for rich people's children to piss around in for three years."

Degrees of Debt: The high cost of learning

£500m annual amount parents pay in university costs

£33,708 projected student debt at graduation by 2010

544% increase in student debt since grants cut. Debt totals more than £5bn

90% of students in debt. In 1992, only a third were

57% of students who work do so to buy basic essentials; 11% work to pay tuition fees

31% increase in student debt since 2002 caused by rise in studying and living

£30 weekly average undergraduates live on after rent

75% of students work during term, three in 10 for more than 20 hours a week

66% of 2003 graduates moved back home to save, and to pay off their debts.