A new study by credit management firm Lowell has found that more than three-quarters of college students (77%) develop personal debt problems while in college. But are students informed of the potential consequences of short-term borrowing?

In the UK, the average annual percentage rate (APR) on a payday loan (a short-term loan) can reach 1,500%, compared to a typical APR of 23% on a credit card. With nearly one in ten students relying on payday loans, Lowell looked at how students finance their college, experience their attitudes toward money in college, and how it might affect them.

The research also found that 76% of students worry about making ends meet and 41% of students have considered dropping out of college at some point due to money worries. [2]

Students rely on credit to fund their education experience

According to the research, the types of debt incurred by students include credit cards (27%), overdrafts (25%), Buy Now Pay Later programs (15%) and payday loans (9%).

A payday loan is usually a short-term loan for small amounts of money with an extremely high APR. For example, if you borrowed £100 with an APR of 50% and agreed to pay it back in a month, you will owe £150 at the end of the month, which is an additional £50 on top of your original loan.

High interest and APR rates like this can have a huge impact on student finances, especially if the students taking out these loans rely on student loans and grants to pay them back. Loans and grants are usually only paid three times a year – not monthly – so students could end up borrowing more than they are able to repay in a short period of time, which could potentially lead to further persistent debt problems.

With 15% of students also relying on Buy Now Pay Later, Lowell wanted to shed some light on this payment method. BNPL can help spread the cost of purchases, sometimes without interest. If managed properly, it can provide a useful way to make larger purchases and manage inflows and outflows.

However, while Buy Now Pay Later products may seem like a solution for students, they may put you at risk of being charged if you are unable to pay. As with any form of borrowing, you must understand the terms and conditions you agree to when making a purchase with Buy Now Pay Later products.

A recent annual survey conducted by save the student also found that 32% of students reported using their overdraft as a source of income, but it should be noted that student account credit limits are increasing year over year, and with 0% overdraft, many students are attracted by what may look like “free money. However, after college, many banks expect students to pay off their overdraft within 1-3 years, putting even more pressure on graduates to find employment in a competitive job market.

It is also noted that students rely on the support of their family (42%) and their savings (36%).

What sources of income do students rely on while in college?

Spending Patterns and Student Debt

Similar to most Britons, students’ spending habits prioritize weekly food shops (56%), rent (52%) and bills (44%).

Despite the pressure on finances, more than a third of students (34%) were still likely to spend their money on parties, takeaways or dining out.

The average amount of debt, excluding tuition fees and student loans, that each graduate completed college with was £2,332, taking an average of 3.8 years to pay off in full.

15% of graduates finished university with over £5,000 in extra loans. Additionally, among all respondents, it took 16% of students four years or more to pay off the personal debt they had accumulated in college.

John Pears, CEO of Lowell, commented on the results saying: “University should be an exciting and rewarding experience, but for young people who leave home and cannot depend on family money, it can also be costly.

“Getting into debt while in college can be a cause for concern, especially if you don’t have a regular source of income or a guaranteed job when you graduate. We want students to know that they are not alone when it comes to struggling with college debt.

“If you are concerned about your situation, help and support is available. A list of independent organizations that can offer support is available on our website: https://www.lowell.co.uk/help-and-support/independent-support/”