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Funding University Education

It's getting close to the start of term and for some students that might mean taking their first steps on the road to debt. Unless their parents can support them, many students choose to fund their university studies by taking out a student loan. Students can borrow money to cover both tuition and maintenance, with a maximum loan amount of £6,170 for students living away from home and studying in London. Students who live at home and study outside London are eligible for the smaller loan amount of £3,415. Students can borrow 75% of the maximum amounts available, with the rest being means tested. The maximum loan amount reduces during the third year of study as it is not intended to maintain students once they have completed the course.

Student loans may be an attractive proposition because of the preferential rates of interest. Although interest begins to accrue from the date the loan is issued, the interest rate is linked to inflation and the retail price index. This is much lower than interest rates on normal loans. It's not surprising that more than 80% of UK students take this option for student financing.

From this academic year, another financing option will be available - to students from low income families, at least. The student grant is back. If a family's annual income is below £17,500, then the student will be entitled to a grant of £2,700 a year - and this does not have to be repaid. Students whose family is on a slightly higher income will get a proportion of the grant and can opt to take out a student loan for the balance.

Once the course is over, it's time to think about repaying those loans - and this is where students need to be careful not to extend the debt trap. Many financial institutions offer graduate loans to help students in the first few months after finding a job. The former students have the option of consolidating all their debt. However, these loans are not at the same preferential rate as the loan from the Student Loan Company, so it's best to look carefully at the fine print.

Some financial advisers recommend that students take the loan money and put as much as they can into an ISA. This means that they earn interest on any money they don't spend and have a lump sum available to repay the loan. This is a useful strategy, especially for those who wish to get onto the property ladder. Any outstanding debt will be taken into account when applying for a mortgage and those with a high level of debt may find it difficult to get a mortgage.