Students choose bankruptcy over debt

The Department for Education and Skills may be considering a u-turn on loans for those in higher education if large numbers of students turn to bankruptcy as a way of avoiding paying off substantial debts when they finish university.

The DfES is reviewing student funding, and has voiced plans to introduce commercial rate loans for better off students. However, Credit Today, the trade magazine for the consumer and commercial credit industry, discovered that the DfES is now considering a u-turn on these plans.

"When we spoke to the DfES, a spokesman suggested that if students threatened them with mass bankruptcy they would have to shelve their ideas on commercial rate loans," said Barbara Buchanan, the magazine's news editor.

A report from NatWest bank yesterday revealed that the average student now leaves university with a debt of ?10,000, a figure which has doubled in the last three years. Bankruptcy is usually viewed as a last option, as the restrictions it imposes on an individual currently last three years, with their credit record being adversely affected for a further three years.

However, the Enterprise Bill, going through parliament at the moment, proposes reducing the length of time until bankrupts are discharged to just one year.

"If the only penalty is a year's credit restrictions we think this could be appealing to a lot of students," says Ms Buchananan.

An individual with any level of debt can become bankrupt by applying to the county court. Bankrupts are then severely restricted in terms of the credit to which they are entitled from credit card companies, loan companies and mortgage lenders, as well as the terms offered to them on bank accounts in some cases. Their credit record will continue to be adversely affected for the three years after the bankruptcy is discharged.

"Students applying for bankruptcy does happen here and has happened for many years in America," says Gill Hanky of the Bankruptcy Association. "We are seeing increasing numbers of students struggling to repay debts, and a lot are now depending on overdrafts and credit cards."

Ms Hanky says that while she would hope students with debts as low as ?2,000 would not file for bankruptcy, she conceded that increasingly students with debts as high as ?16,000 can often see no other alternative.

"I would never say you should avoid bankruptcy at all costs," says Ms Hanky. "For some people with debts they can't service then this could be a feasible option providing it didn't impact on their future income potential, which would be the case for those wishing to enter the legal profession or accountancy for example."

Despite the dire financial situation students face, the NUS believes bankruptcy should not be a consideration for students with high debt levels.

"I don't think anyone would urge people to strive towards bankruptcy," said a spokesperson. "And I don't think using students as a sacrifice to get the DfES to change its stance would be a good idea.

"We're still awaiting the results of the government's student funding review which was supposed to have been published in October, then at the beginning of the year and has now been postponed until summer. It's looking pretty sunny outside today but we're not holding our breath for an announcement."