How to overcome a student debt and profit from it.

If you leave university with a debt of, say, £21,500 in student loans (as my sister recently did) you will be facing for august 2008 an interest payment of £85.37 but 9% of the threshold earning rate is only £25.96 per week or about £103.84 for the month. so you are slowly paying off the borrowing but most of that is interest.

Now what makes this particularly bad is that at no point is it made explicit that the interest is charged from the beginning so for a whole length of time compound interest was being charged making the numeric size of the debt grow bigger. It's scary.

Especially as the websites seem to go to great pains to avoid talking about the rate of interest and the fact that it is charged from the onset. This strikes me as somewhat dishonest and something that you should be aware of. It is wrong, in my opinion, to assume that a student has any idea how things are going to work. It is the duty of the lender to educate the borrower and not to mislead in any way.

Should one panic though?

The short answer is no and here is why. Assuming that you are able to save some money each month into an savers account that pays more than the base rate of interest you will sooner or later reach a point where you earn more in interest than you are paying for.

In fact if you can take out more student borrowing and invest in the higher than the rate of interest savings account. The interest in the savings account is now higher than the rate of interest on the debt. The savings are now growing faster than the debt. Good stuff if a little scary.

If you start earning £15K a year gross then you pay 9% of that at source which is equivalent to £25.96 a week on pre-tax earnings of £228.45 a week. This could feel quite nasty of you shift from £220 pre tax to £230 pre tax as take home (gross or post-tax income) will drop by £25.96 each week. It seems to me that from here on up you want to look for pay rises of greater than 9% to take home a little more.

So the mean time you are paying for the debt but the good news is that it does not effect your credit worthiness (in credit scoring it's not taken into account) and only when ability to pay (say for a home loan) is the debt ever considered. That's where those savings come in handy to put on the balance sheet as an offset.

Just remember to pay off all other forms of debt first.

The one thing to never ever do with a student load is pay off early. That money will always earn you more in a savers account than it will save you. moneysavingexpert.com has more student loan tips.

There is a mild worry to keep an eye on. The Government is set to sell the debts on and although it states that this will have no impact how safe you feel depends on your trust of government promises.