Student Debt: how do we get around it? – Charlotte Stenning

The Problem
The Association of Investment Companies (AIC) has shone a light on the extent to which
parents underestimate student debt. Research from the body shows that students think that they will accumulate an average of
£37,935 in debt, whilst parents expect a debt average of £23,954.
However, the Institute of Fiscal Studies’ estimate shows that student debts could rise to
over £50,000. To me this is almost incomprehensible.

The AIC suggests investing money could be more rewarding than a cash savings account
in the long term. This would be hugely beneficial for students suffering from finance
complications, allowing them to avoid the astronomical debt they could accumulate.
According to the survey, if you invest £25 per month over a duration of 18 years, £5,400 of
total investment could grow to £17,741.74. An investment of £50 per month over the same time period would produce a total
investment of £10,800 which could grow to £35,483.42. For an even bigger investment of £100 per month over 18 years, the £21,600 total
investment could increase to £70,966.84. This incredible amount of money could clear any
student debt collected and leave extra money to finance other issues encountered by a
student, such as funding a car or first home.

As a long-term saving solution, investing money in the average investment company can
treble the amount of money you originally invested in 18 years. This is an astounding revelation to me; a student about to start my A-levels with the
aspiration of reaching university. There is an obvious risk that my debt levels could spiral
out of control. The debt could be avoided, a feat I did not think possible due to a preconceived
expectation I had to take out a student loan, something most people do.
In hypothetical terms, if my parents had invested money per month since I was born,
based on the AIC stats I would be able to clear any debts and have no need for a loan. To
me this seems almost unbelievable. As Albert Einstein said: ‘Compound interest is the
eighth wonder of the world’.

Education on money saving options
What I also found interesting in the AIC study was that only 41% of parents are aware of
the minimum monthly amount that can be invested in a stock market linked savings
scheme. There appears to be a lack of general knowledge about the options available to parents
when it comes to saving money for their children.

The study showed that of the parents saving money for their children in the future, 66%
save through a cash savings account and a mere 15% make investments.
To me, this reveals a huge problem. Parents are not maximising the amount of money they
can save for their children by utilising investment accounts. I understand that cash savings accounts are considered to be more stable as they greatly
minimise the risk of losing money.

However, as AIC communications director Annabel Brodie-Smith points out, interest rates
are very low on these accounts which is producing a minimal gain from cash saving.
‘Parents are underestimating the amount of student debt their children will graduate with,’
Brodie-Smith explains. ‘Those who have a long time to save towards their children’s futures may want to consider
alternatives to cash to try and get the most from their savings. Interest rates are still near
record lows and this will have had a significant impact on cash savings.’
Although there are clear risks with stockmarket investing, if parents are educated to start
saving as soon as their child is born, we might see a reduction in the frequency of students
left with astronomical debt levels.

Eighteen years of regular investing based on the data shown by AIC supports the theory
that investing is about ‘time in the market, not timing the market’.
It seems clear to me that in order to remove the problem of student debt in universities and
other financing problems, education on finance and methods of saving money must be
incorporated at secondary school level.

What I find absurd is that many children are made aware of bullying and other such matters at school,
but somehow financial knowledge is neglected to be imparted. If we grow up learning about different money saving methods, we can all contribute more
profusely to the economy and save in a smarter way for our children. The AIC has encouraged me to realise that the student finance problem is not something
that should be encountered when we reach 18, but rather something that should be
tackled from birth. This would only be solved through educating more people on general financial issues at
school. More people can then make judicious decisions with their money and be able to
help their child clear their student debt quicker. RHS is tackling this issue with the sessions run as part of RHS VI, but should it even be introduced earlier?
We need to be exposed to methods of saving money at school and these findings by the
AIC should be the trigger to make this happen.

Article was first published on Citywire Wealth Manager on 16 August.

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