STUDENT LOANS: “DIFFERENT KIND OF DEBT”?

There’s been some Twitter traffic lately about student debt, including some tweets just yesterday.

Firstly, this from @CashQuestions (Annie Shaw):

“There’s some sort of bullsh*t doing rounds that student debt shdn’t count if u apply for a mortgage. It counts when u come to pay tho – doh”

That was, I think, a response to this tweet from @little_mavis (Mary Wombat) (and retweeted by @CashQuestions):

“I hate the ‘student loan debt isn’t really debt’ or ‘a different sort of debt’. A DEBT IS A BLOODY DEBT. YOU OWE SOMEONE MONEY.”

“Yeah but no but”

So … are student loans are a different sort of debt?

No, absolutely not, in that you owe someone money.

However, yes, in that the debt does not fall due unless and until your income goes above a certain level. In that way it becomes more like a tax.

If you had a bank loan, the bank would not say “OK, that debt is not due; you don’t have to pay me because you don’t have a job – or you have a low-paying job – right now.”

In that way a student loan is better than other kinds of debt, as far as the debtor is concerned.

Effect of bankruptcy

However, if the worst comes to the worst and someone goes bankrupt who still has student loan debt: in that case, the student loan is different too. In my book “Back to the Black: how to become debt-free and stay that way”, I say this:

When you are bankrupt you do not, in general, make payments to your creditors; they make a claim to your trustee instead. There are, however, a few exceptions, payment for which you remain responsible. For example:

  • secured creditors (e.g. any mortgage you may have)

  • “non-provable” debts (e.g. court fines and maintenance arrears under divorce settlements)

  • student loans.

Repay or delay?

Here is another interesting issue around student loans. As Martin Lewis says (30.08.2011) on his excellent “Moneysaving Expert” site, student loan is (relatively) cheap debt; therefore should you repay it faster than you’re required to (if you’ve got spare cash) or is it better to save?

The answer depends, of course, on your situation, so the site has a calculator to help answer the question.

 

WANT TO KNOW MORE?

The MoneySavingExpert site and calculator: click HERE:

“Back to the Black”: eBook on managing debt

To sample for free, or purchase (£0.70 / $0.99), my debt advice book:

  • “Back to the Black: how to become debt-free and stay that way” is available in the Kindle store. Click HERE:
  • It’s also available in all e-formats, including .pdf, at Smashwords. Click HERE:

 

POPULAR NEW (ISH) LENDERS GAINING GROUND

A while ago I blogged about the new(ish) peer-to-peer lending websites, such as Zopa, the largest in the UK. I also said I’d be looking into the matter further.

So I decided to read what the established financial journalists (the people who are paid for their expertise) are saying.

I’ve looked at a few of them, following the principle of Lobachesvky, who famously said: (according to the legendary Tom Lehrer): “To steal from one source; that’s plagiarism. To steal from many: that’s research.”

Firstly, I’ve learned that Zopa stands for the “Zone Of Possible Agreement” and its aim is to cut out the middleman by putting lenders and borrowers directly in touch. The site acts as a facilitator and makes sure debts are repaid.

“Personal finance just got a whole lot friendlier”

In an earlier post on this subject I mentioned Maryrose Fison’s article with the above title (January 2011) in the Independent. See below for a link, as it’s still on their website. Here’s my inexpert précis of what some other writers have said.

Rosie Murray-West, Daily Telegraph

She says that “(new-style) Peer-to-peer lending websites and old-style credit unions have been major beneficiaries of public anger against the banks, seeing a huge level of growth in 2010.

“ …Zopa … allows ordinary people with savings to lend them out at an average rate of 8pc and has now lent a total of £110m. Its rising popularity has led to four new peer-to-peer lenders being created in 2010, and the industry is now working on becoming properly regulated and establishing a code of conduct.”

Credit Unions

“Meanwhile credit unions, which are co-operative organisations offering affordable loans and accounts without bank charges, have also grown.

A spokesman for ABCUL, the credit union association, said the amount of savings in British credit unions had risen by 27% in the two years to March despite the fact that many British people were struggling to save in the current economic climate. The number of new members of credit unions rose by 18.4% in the same period.

“Mark Lyonette, ABCUL’s chief executive, said that Credit Unions continue to grow as more and more people seek a fair and affordable alternative to the high street banks. He added that if the Government made good on its interest in making credit unions accessible through the post office network, there was the potential for many more people to join them.”

Martin Lewis’s ‘Money-Saving Expert’ site; opinions on Zopa

The ‘MSE’ site was sceptical about Zopa at first. But now they are saying that under certain conditions, it makes sense. As of today, the site’s view is:

“… for those with a good credit score, there’s an alternative. Zopa is a unique internet marketplace which couples people who want to lend with those who want to borrow. On application it gives you a credit score, and if you get its top A*, A or B ranking, you can borrow.

Loan rates vary daily and are determined by the amount needed and length of borrowing. For A* or A grade credit scorers wanting cash over 36 or 60 months, it can beat some loan rates, particularly on smaller amounts; currently, 9.6% APR is available for loans of £4,000, for example.”

View of a Zopa customer

By way of a change from the financial journos, here’s a quote from an actual Zopa borrower. (5 July 2011)

“Just thought I would let you all see my finished kitchen :o) All tiled and just about back to normal now. Thank you all to those who have helped me pay for this, you have no idea how happy I am it’s finally been done! :0} xxxxxx”

Editor’s note (that’s me): there is a video on Zopa’s Facebook page too but I’m not able to reproduce that, because I haven’t done the training course to insert video.

For your guidance, their loans are apparently mostly for the purpose of home improvement (like the above), cars or debt consolidation.

Moneywise “Most Trusted” awards

… and finally, I must congratulate this peer-to-peer lender for having achieved an important award. According to Moneywise magazine, Zopa is the UK’s Most Trusted Personal Loans Provider 2011. This was for the second year running and was against a shortlist that also included First Direct, Nationwide, Tesco Bank, Sainsbury’s Bank and Natwest.

WANT TO KNOW MORE?

1. For Rosie Murray-West’s article from the Daily Telegraph: http://www.telegraph.co.uk/finance/personalfinance/savings/8214641/Savers-spurn-banks-for-Zopa-style-peer-to-peer-lenders.html

2. Peer-to-peer lending: how to choose the right site by Emma Simon. (also in the Telegraph)

3. For the article in The Independent by Maryrose Fison: http://www.independent.co.uk/money/spend-save/maryrose-fison-personal-finance-just-got-a-whole-lot-friendlier-2173935.html

4. For the Money Saving Expert site and newsletter signup: http://www.moneysavingexpert.com/

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For a free sample of my book, “Back to the Black: how to become debt-free and stay that way”:

Kindle format: http://www.amazon.com/dp/B004PLMAQM

Other e-formats, including .pdf: http://www.smashwords.com/books/view/22886

You can follow me on Twitter: @michaelmac43, on Facebook: Michael James MacMahon, or on Linked In.