As student debt continues to climb, a new analysis by the Institute of Fiscal Studies (IFS) has found that the average student will end up graduating owing a whopping £50,000. Randy McFarlane, head of sales and partnerships at Intelligent Environments, explains how a digital solution could help students tackle this debt.
Shockingly, the rapid rise in tuition fees coupled with rising interest rates have led the IFS to forecast that three quarters of graduates will never be able to repay their loans.
For students, leaving university with such heavy amounts of debt can be a challenging experience, and something that is not going away – the government’s recent Higher Education and Research Bill now allows Universities in England to increase tuition fees every year until 2020.
More than Money
There are also issues of complexity, with many students unclear on the terms of their loan. For example, the fact that a high-level of interest is charged – up to 3 per cent above RPI – while the student is still studying means that while they borrow £45,000, students end up owing £50,800 from the day of graduation. And with repayments kicking in at 9 per cent on earnings above £21,000, understanding the full extent of their debt can be problematic.
Our own research into the topic found that the impact of this debt has had far-reaching consequences with three quarters (75 per cent) of students admitting to feeling stressed about the amount of debt they are accumulating while studying. The stress, they say, is impacting numerous areas of their lives, including relationships (35 per cent), friendships (34 per cent) and exam results (32 per cent).
Given the extensive impact debt can have on students’ lives, it is now up to banks and other student organisations to work together to provide them with the digital tools they need to help keep on top of their finances. Apps and other digital finance technologies help ensure student money management is transparent, providing them with visibility over their finances. What’s more, students are demanding this assistance, with just over a third (34 per cent) stating their banks could do more to help with money management. In addition, over two thirds (66 per cent) say their debt would be less stressful if their banks offered access to digital money management tools or apps to help them manage their maintenance loan incomings and outgoings.
The arrival of the second Payment Services Directive (or PSD2 for short) will help. Set to transform the way consumers engage with their money, consumers will be able to share their banking data with third parties, receiving impartial and objective advice that is tailored to their specific situation and that considers all their financial commitments.
With the freedom to choose the financial service platforms that suit them – rather than being limited to the tools provided by their bank – students will be able to have a clear view on their financial matters, allowing them to take back control.
Making the Complex Simple
Additionally, when it comes to debt collection solutions, repayment should be as simple and intuitive as possible, with financial institutions ready to empathise with consumer needs and ready to recognise problems before they become insurmountable.
Digital technology should play a key role in collections. As digital natives, today’s students are used to taking the active role in interacting with services – and would expect their financial service provider to work on their terms. And when it comes to debt collection, a lot of change is needed. Embracing new digital channels – from Facebook Messenger to Whatsapp – to provide relevant and useful information is a must.
Critically, financial service providers must be sensitive to individual needs, offering a real time, low stress, and non-confrontational method of engaging students. Doing this will go a long way to alleviating problems and prevent ongoing debt issues.
Ultimately, in the uncertain economic times we find ourselves in, starting out burdened with such high debts is a less than ideal situation. As such, it’s up to the financial services industry to help teach students the necessary skills to manage their finances in a healthy way. We must do more to offer the tools as soon as possible that will allow students to avoid unnecessary debt, and one-day live debt free.