A generation Y-er’s verdict on the latest developments in the world of young people and personal finance.
The University of East London this week became the first university to ban payday loan adverts on its campus, following concern from debt charity StepChange about under 25 year olds’ increasing reliance on these high-interest loans. 42% of young people approaching the charity in 2012 had problems with payday loans, compared with 25% in 2011.
UEL also revealed that of 28,000 students, 2,000 of them had dependent children, which puts students from this university at particular risk – a recent report by the National Union of Students (NUS) found that this is one of the groups most susceptible to taking on this type of loan.
Nicole Redman, Head of Student Money Advice & Rights Team (SMART), said: “Our advice to students is to try and avoid the temptation of a payday loan at all costs. While it might seem like an ideal solution in the short term, the long term repercussions can be very serious, with students finding themselves in a vicious circle of insurmountable debt.
If a student is experiencing any financial difficulties, we would strongly encourage them to get in touch with the SMART team. We will always do our utmost to try and advise students about what the safe and practical alternatives are.”
EDUCATION AND EMPLOYMENT
The short-term benefits to the government of the introduction of higher tuition fees will soon be outweighed by the longer term costs of the systems, and will eventually end up costing almost 6.5 times more. A recent study by the university thinktank, Million+ found that a combination of the higher write-off of student loans and higher student loan book, together with reduced overall earnings and tax revenues, will lead to higher overall Treasury expenditure.
Pam Tatlow, Chief Executive of million+, said:
“The shift from the direct funding of universities to indirect funding via student loans has protected student numbers and on paper, helps the government reduce the structural deficit.
“The real question is how to maintain a thriving, efficient higher education system which is good for students, good for universities and good for the taxpayer.
“Once the total economic costs are taken into account, the jury has to be out as to whether the Government’s reforms are the most cost-effective way of funding higher education.”
In preparation for the introduction of financial education to the national curriculum from 2015, The Guardian is offering tips on how to teach it. Resources are available from The Guardian Teacher Network.
Moreover, unusually for this blog, a single blogpost on the Ambitious Minds website has caught my eye this week, and merits special attention. According to this post, the rise in payday loan use among young people highlights the need for better financial education in the UK. Adam Yates says:
“If we are to make good on the proposals to include financial education on the National Curriculum, we need to ensure that young people are given a broad range of skills that enable them to see beyond a basic understanding of APR rates and repayment dates and to understand the impact such decisions will have on their lives overall. Hopefully, that will mean far less young people opting to take out payday loans.”
SAVING AND INVESTMENT
More evidence that the UK population is still struggling to engage with long-term financial planning. A new study – the seventh annual savings and investment report by Scottish Widows – has found that 31% of adults is failing to save. There was also a rise in the number of people who had given or lent “substantial” amounts of money to their children, or a relative, often just to help them pay for everyday living. A quarter of respondents said that they had given money to their children – on average £14,865 – which is yet more evidence of the increase in living costs. Moreover, grandparents were also helping their children out more – with the typical amount ranging from £3,500 to £4,500.
Over in Canada, The Globe and Mail looks at ways in which young people can buy a house without saving for a deposit. In the article published last week, it reports that young people are the group most likely to seek out alternative down payment sources. So what are these alternatives, and what implications might they have for young people in the UK?
-Borrowing from other credit sources.
In order to buy a home, average down payment is about 5% of the total value of the home. However, would-be homeowners are not allowed to borrow that amount from their mortgage provider if it is a bank or federal trust company.
This means, though, that in theory (as long as they can prove they can still afford the extra repayment costs) borrowers are still able to draw on other sources of credit, even though the interest rate repayments can be considerably higher than that of the original lender. Well, this is generally not advisable for young people in the UK, although there is talk by credit unions of making lower interest credit available for struggling young people – but it is unlikely that this has stretched as far as the loans needed for a mortgage deposit.
-Getting a cash-back down payment mortgage.
This is exactly what it sounds like. It is possible to get a cash payment to use for a mortgage, and then only pay the closing costs (inspection and legal fees). But nothing comes for free. Interest rates on these are often much higher than that of a normal mortgage. There is also less opportunity to benefit from equity – there is less of a cushion, and if a borrower breaks the mortgage early, the lender is entitled to claw back a portion of the money. Moreover, these types of mortgages are set to be eliminated by the end of this year.
At the moment, they are only offered by a handful of organisations to those who have a good credit history. At least this rewards those young people who have built up a solid credit rating…
-Using a gifted down payment.
UK readers might be familiar with this one. As long as the down payment comes from a relative, most lenders will accept this as a deposit.
And why wouldn’t they? Well, unfortunately, some people might occasionally claim their down payments as gifts, even if they intend to fully repay the loan – and this raises the risk of default slightly.
-RRSP Home buyers plan (HBP)
RRSP stands, in Canada, for a registered retirement savings plan, and first-time buyers are allowed to borrow up to $25,000 of their future retirement fund as a down payment on their home.
Whereas in the UK it sounds risky enough, in Canada, it means that young homeowner face the potentially disastrous prospect of missing out on years of tax-deferred investment gains.
Could we then see this becoming a policy proposal of the UK government? After all, the introduction of auto-enrolment will mean that young people will have a greater chance of building up a pension fund, and the long time horizon will help maximise returns through compound interest. But no matter how depressing it is that young people might be denied the chance to own a home while putting away a sizeable proportion of their monthly income – the other possible outcome, that they might be left with just the flat-rate pension upon which to survive for retirement is just too frightening to bear.