Student finances: Banking on a future loan?

The student population lives in the now and postpones the unpleasant wherever possible.

When a bank offers an interest free overdraft of €1,000 for the duration of your college degree, you can bet the farm any student would chew off the bank assistant's arm for it.

And this year, Ireland’s banks have taken credit lifelines for students to a new level.

To most students, news that ‘interest rates are at an all time low’ won’t mean much, but low rates do in fact have an effect on the ground.

To explain the current situation in layman's terms, investors want return on their money.

But right now with the world economy lagging and despite endless money printing by central banks trying to stimulate the economy, it is still very hard to generate a decent return through traditional “safe” methods such as savings accounts and pension funds.

Take a look at interest rates offered for savings accounts in your local bank or credit union. Chances are they will not generate more than 1 per cent before tax (41 per cent of interest earned is collected by the Irish government in a tax called DIRT).

So for a moment, I want you to pretend that you are a bank.

Your shareholders demand that you make a profit, which you make through lending via mortgages and car loans for example. But you have a problem; many households are still crippled from the 2008 Irish banking crisis and are either not able to afford new cars or houses or are already smothered with debt.

Eventually, you begin to realise that there are not enough credit-worthy customers to lend to in order to generate the return needed for your shareholders. So the natural reaction is to start aiming your loan offerings at riskier customers.

This is where you, the student, comes in.

Please do not be offended for me calling you risky, but it is true.

For the most part, students do not have a secure reliable income (lack of job security and zero hour contracts anyone?). We do not own any assets of note (1997 Corollas do not count unfortunately).

We also have no credit history to prove that we can make repayments on a loan on time.

Finally, and most importantly, we certainly do not make the smartest financial decisions.

In a trade off between the purchase of a textbook or a night out in the city, how many students would chose the former?

So, this is where the financial institutions come in and save the day. They present us with an array of fixes to satisfy any credit needs.

A quick look at each of the major financial institutions websites presented me with options for standard student loans at a hefty 8 to 10 per cent APR, interest only for the period of study student contribution loans (which later rises to over 8 per cent APR), credit cards with 6 month interest free on balances (rising to nearly 20 per cent APR after that) and interest free and 1 per cent APR overdrafts of €500 to €1,000.

My personal favourite that I found was “Preferred Faculty Loans” offered by one institution where students from sought-after and highly employable courses can borrow sums to cover all expenses and pay nothing at all until they start earning.

To top it off for the credit junkie, you enjoy zero interest rates during your whole period of study right up until graduation.

It must be said that there certainly is no one-size fits all when it comes to financing one’s studies. What is sensible for one student’s needs may be reckless for another’s.

If your course has a good track record of employability after graduation, then taking on some debt, be that in the form of a loan or free overdraft, may not cost so much and may be a wise decision if the alternative is taking a year out.

Careers prospects for some students may be less rosy or very cyclical in nature.

If you plan on taking on debt in such scenario, you must put serious thought into how you are actually going to pay it back upon graduation because you may not have the income to support it.

Likewise, beginning postgraduate education with a huge debt burden behind you (that continually racks up interest), while taking on further debt to fund said postgraduate education would be a very unpleasant situation to find yourself in.

One only has to look at the situation across the Atlantic where $1.3 billion is owed in student debt in the USA.

It is not realistic to say that every student can emerge debt free from third level education. However, there is a happy medium that can be reached which is both sensible and viable in long term.