From student loan to your first pension and mortgage
You go to university because you want a good job and career. But what you won’t necessarily learn is how to adapt to your new life earning money and being financially responsible. Here are the top tips about work and finance that every graduate should know.
There are many daunting aspects of graduating from university. Will you get a job? Has Dad taken over your bedroom with his vinyl collection? But one of the biggest worries is, of course, money. After three or more years of regular income from student loans and (perhaps) grants, with the added bonus of zero interest bank overdrafts, you come to the day when this cash flow is cut off – and you have to start paying it back. No wonder many graduates dread this moment even more than their final exams.
But it doesn’t need to be so frightening, if you know what to expect. Here are the top tips every student should know about finance when graduating.
When will I start paying back my student loan and how much will I pay?
For most graduates, the biggest of their financial burdens is their student loan. Remember, you only have to pay back government-provided tuition fee loans and maintenance loans. Any other bursaries or grants do not need repaying.
Currently there are two different loan plans in existence. One covers pre-2012 (P1) start dates, while the other covers post-2012 (P2) start dates. September 1st 2012 is the cut-off between the two plans.
- At the moment P1 graduates start paying back their loan once they are earning £17,775. This payment threshold changes every year on April 6th.
- P2 graduates start paying back their loan once they are earning £21,000 (or £25,000 from 6 April 2018)
P2 has been in place since 2012, so let’s focus on that one. Once you start earning over the threshold, your loan repayments will be fixed at 9 per cent of the difference between your yearly income and the threshold (which from 6 April 2018 rises to £25,000). That may sound confusing, but actually it’s quite simple. For example:
- Say you earn £25,000 a year (before 6 April 2018)
- This is £4,000 more than the threshold of £21,000
- So your monthly student loan repayments will be 9 per cent of £4,000
- So you pay £30 a month.
If maths isn’t your strong suit, try the Student Loan Calculator from the Complete University Guide to calculate your repayments.
How long do I have to pay off my student overdraft?
Think of an overdraft on a student bank account as a six-year process. You have the three years when you are studying, during which you can progressively increase your overdraft to an average of £3,000 in total. After that you have the first three years after graduating, during which your limit is gradually decreased by £1,000 per year.
If you are someone who has taken full advantage of your overdraft, then this would mean repaying almost £84 each month for the next 3 years. This may be difficult, but you should make every effort to do so, as the penalties for being over your limit are usually charged on a daily rate – so can soon add up to an eye-watering sum. If you don’t think you will be able to manage such a steep repayment rate, try to rein in your use of the overdraft during your final year of study (hopefully you will be partying less).
For more information on what happens to your bank account after graduation see the Guardian’s guide.
Once you graduate, your bank of choice will usually change your account from a ‘student’ account to a ‘graduate’ account, moving your overdraft with it. But just because you have been with that bank throughout your studies doesn’t mean you have to stay. This is the best time to shop around for an account that suits you. For a comprehensive comparison of the most popular graduate bank accounts, check out Student Money Saver’s ultimate guide.
How do I save for a mortgage?
Saving for a mortgage is a long game. It may seem a long way off when you graduate, but at some point in life most of us want to own our home. This requires a big deposit, so start to save as soon as you can. This lets you make the most of the greatest wonder of the financial world: compound interest.
The Help to Buy ISA can be opened with a maximum one-off deposit of £1,200. From then on you can put in up to £200 each month. The government then pays you a 25 per cent bonus on savings between £1,600 and £12,000 when you complete on a home purchase. This means if you save £12,000 you will get an extra £3,000 from the government. However, the bonus is only paid on completion, so you can’t use it for the initial deposit – only the mortgage deposit.
And in case you are wondering, if you start with the maximum deposit and pay £200 a month, you will have £12,000 in 4.5 years’ time – hopefully around the time you are ready for life’s next big decision.
A Lifetime ISA is a much newer product that is potentially even more useful for first-time buyers, though it too has some drawbacks. You can read more about this ISA here.
A pension - do I really need one at 22?
The short answer is ‘Yes’ and the long answer is also ‘Yes’!
Quite simply, a pension is a way to save money tax-free over the long term. Although retiring is the last thing on your mind when starting a career, you can save yourself huge amounts later on by starting a pension early (because compound interest is so powerful over time). To put it another way, every pound saved in your twenties can be worth roughly £2 saved in your 40s.
It is now easier than ever to join a workplace pension scheme, thanks to auto-enrolment. This means that you have to ‘opt-out’ rather than ‘opt-in’ to your employer’s pension scheme. Just like student loan repayments, your pension payments will be taken automatically by your employer before tax and added to your pension fund. Many employers also offer like-for-like pension contributions up to a certain percentage.
Every time you receive a pay rise, it is a good idea to increase your pension fund contribution. Money Saving Expert Martin Lewis recommends taking a quarter of the amount from every pay rise and adding it to your monthly pension contribution.
Follow these tips, and it won’t be long before you have your degree in financial independence from the University of Life.