Student loan may stop you buying a home

Simon Lambert, This is Money
24 January 2008


Graduates struggling to get on the property ladder will be hit by student loans going on to their credit reports for the first-time in the same year that interest doubles.

Struggle: Graduates hoping to buy their first home could be hit hard by the inclusion of student loan payments on their credit file

The student loan double-whammy has come as a shock to many graduates who will see missed payments go on their credit files and the rate on their loan rise from 2.4% to 4.8%.
The changes come as graduates are increasingly complaining that they have been misled over student loans.

While students are told that interest rates are kept in line inflation when taking out loans, many are unaware that the rate is set according to RPI inflation rather than the newer - and lower - official CPI measure.

This has led to the rate on loans doubling for the next year to 4.8%, from 2.4% the previous year, due to a spike in inflation.

And potential first-time buyers already struggling to cope with high house prices and mortgage lenders tightening their criteria have been warned by mortgage comparison firm mform.co.uk that missed payments being recorded on their credit files could cause problems

It said that the plans to include student loan data on credit files are unfair and could lead to more first-time buyers being turned down for mortgages.

While missed payments on student loans will show up as a black mark, positive details on those who have made all their payments on time will not be recorded.

Francis Ghiloni, marketing and business development director at mform.co.uk, said: 'The average student can face debts of over £20,000 by the time they graduate, and their average starting salary is around £16,000.

'Given statistics like this, many students miss one or more of their student loan repayments, and this information will soon be made available to credit reference agencies and therefore the banks and financial services companies that use them.

'If they can see a history of missed payments here, they are likely to be less willing to lend you money.'

The Government has not yet confirmed when it will begin releasing information about student loan payments to credit agencies, but the information will begin to show up this year. The move follows anger at the announcement last autumn that the Student Loan Company was putting the rate of interest up from 2.4% to 4.8% - the highest rate since 1991. This puts a supposedly low interest rate loan tracking inflation at a similar level to the rates on the best fixed rate mortgage currently available.

Protests have been made against the change, with a group set up on networking site Facebook attracting more than 26,000 members. Most complaints have called for student loans to track the official CPI measure rather than RPI.

Higher education minister Bill Rammell was criticised after defending the loan interest stating that repayments would not change as they are collected as a percentage of salary above £15,000. Critics pointed out that this was encouraging poor personal financial management as the repayments may not change but the interest rate charged on the outstanding balance had doubled.

I may have missed something, but student loan repayments are deducted at source by the employer, and only if the employee is earning over £15k, of which 9% of anything over that threshold is paid over. So how to missed payments arise? If you're not earning, you don't pay. Maybe for self employed graduates?

Altho, if student loans do affect mortgage approvals and rates, I as a graduate with nearly £11k student loan won't be too happy.

I may be wrong but I think this applies to students under an older scheme who pay monthly by direct debit paying off the loan over 10 years - this is not by salary deduction like the new system. Its easy to miss a payment under the direct debit system if you change banks for example.

Ah fair enough doccyboy, I didnt realise there was an older scheme that worked like that.