Warning students against debt may be more dangerous than you think
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This is a stark warning to parents and grandparents. If you're one of those people who proudly tell your student offspring: "Don't get into debt, don't borrow a penny," then I want to wag my finger at you. It's possible that doing this will make things worse.
In an age where almost half the country's school-leavers go to university, this sort of well-meaning advice could pose huge problems to their long-term prospects. Some of you may deem this controversial, but I refuse to apologise.
Let me explain. These days, a majority of students have to borrow to go to college or university by taking out a student loan. It's government-enforced borrowing. This in itself isn't a problem for me. What annoys me is that we are a nation that happily educates our students into debt but never educates them about debt.
Our elected leaders bang on about a debt nation, yet at the same time are desperate to encourage university participation and home ownership - both of which, for all but the super-rich, require serious borrowing.
On top of this, there's no compulsory financial education in our schools to prepare them for it. This inexcusable attitude has left a financially and debt-illiterate nation, and our youngsters are not equipped with the tools to delineate between the good and the bad when it comes to borrowing.
So let me say it again, only louder and clearer this time: unless you're ridiculously rich, your student offspring will have to borrow to keep their heads above water at university. And telling them not to will only add to their worries.
The nightmare scenario
Let me give you an example, which I've encountered time and again.
Little Jimmy or Jane goes to university. The last thing they're told by their family is not to borrow, but very quickly they find that they've run out of money. So they have no option but to say "to hell with it" and take out a student loan.
Then, having already shattered the debt taboo, they go a step further and take out a zero-per-cent overdraft at their bank. After all, what's the difference? This ready money all seems too easy, so they apply for a credit-card and the borrowing cycle is in full swing.
Before long, they graduate and find a job. They expect life to be a piece of cake from thereon in, but it's quite the opposite. Despite having just made their first tentative steps in the working world, they're weighed down by debt and interest so they're not feeling the benefit.
So, as it's now all seemed easy, they borrow more to supplement their already insufficient income. And before long they're either in debt crisis or still in hock in their 30s.
You may think I'm exaggerating, but I've spoken to countless people who've found themselves in exactly this position. Their problems stem from poor, albeit well-meaning, advice from their family and the fact that no one ever taught them about borrowing.
What we should teach our youngsters
We need to accept that they will borrow, but they must understand that not all debts are identical; there are relatively good and very bad debts.
Official Student Loans - a good debt. In fact, it's the best long-term debt you'll ever get. It doesn't appear on credit files so it will never pose anyone any problems getting a mortgage.
But better still, graduates don't have to pay it back until they earn £15,000 or more, and even then they only repay nine per cent of the amount they earn above it, so the less they earn, the less they repay. The best way to think of it is like a sort of graduate tax, but one that stops once the money's repaid.
And finally the interest rate is set at the rate of inflation, so, in real terms, the debt doesn't cost anything. If they borrow a shopping trolley's worth of goods now, they will only repay enough cash to buy the same shopping trolley of goods whenever they pay it off. This year, graduates are being charged 3.8 per cent, the rate set in March.
Zero-per-cent overdrafts - okay debt. The 0-per-cent overdrafts banks give students are somewhere in the middle. They help students with cash-flow problems, and in the short-term they don't cost a penny. But in the long term they can be very costly, as most banks tend to hike up student overdraft interest rates the moment their customer graduates. Having said that, they can be a useful tool if managed correctly and with care.
Commercial debts - bad debt. Bad debt is any type of debt charged at commercial rates of interest. For students, this generally means credit-cards or loans. These are nasty, hideous, evil beasts and grandparents and parents alike should rail against them.