THERE are plenty of things to look forward to about going to university, but being in debt — a fact of life for most students — is not one of them.
Last year the average graduate debt was about £13,500. But for this year’s freshers the final figure is likely to be much higher because tuition fees have soared and bigger loans will be on offer to meet the cost.
Receiving an additional loan to pay fees may ease some of the financial burden during the university years. However, most students will still have to stretch a maximum maintenance loan of £4,405 to cover rent, course materials and living costs.
If you have never had more than £100 in your bank account before, your loan entitlement may sound like a lot of cash. But with rent as high as £4,500 a year in London and in the region of £2,000 to £4,000 elsewhere, it is unlikely to go as far as you think. This is when the bank that you use becomes important. This year banks are enticing students with gifts such as MP3 players at Lloyds TSB, MP4 players at HSBC and railcards from NatWest. They are prepared to give away freebies to attract freshers because they know student customers are likely to stay with them long after they have left university.
But a word of warning: if you do remain loyal, the special treatment will not last long.
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Stuart Glendenning, of moneysupermarket.com, the price comparison site, says: “Students should make the most of being courted by the banks but recognise that, though little profit may be made out of them while they are studying, payback will commence after they graduate. The bank will be looking to recoup some of the money it has invested by charging higher interest on overdrafts and other borrowings.”
So it is important to choose wisely. Your decision should be based not on the best freebie on offer but on the generosity of the account terms. Choose the wrong one and you will be hit hard by high penalties. For instance, if you experience financial difficulties while you are studying and accidentally go over your overdraft limit, you may end up forking out for charges as high as £30 a day with a Lloyds TSB account.
Writing cheques when you are over your limit will incur further charges — up to £38 per rejected item with NatWest. The interest that you pay could also rocket to as much as 32.92 per cent a year, with a Co-operative Bank student account.
Some banks are less harsh than others. The main feature of all student bank accounts is that they do not charge any interest on set authorised overdrafts, which means that up to a certain point there is no penalty for your debt. Authorised limits will go up during the course of your degree, which is useful, as your loan money begins to dry up.
Halifax has the most generous first-year authorised overdraft allowance at £1,750, rising to £1,900 in year two and £2,100 in the third year. From other banks, students can expect around £1,000 in the first year, rising to £2,000 in the third, with the exception of Lloyds TSB, which allows a maximum limit of £1,500 for all three years. Anyone on a four or five-year course will not be entitled to a higher interest-free limit than third-year students.
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Budgeting to stay within these limits is hard, especially if you have never had to manage large amounts of cash before, so going over the limit is a real danger.
Your bank may suggest that you take out a credit card to tide you over. Most student credit cards impose limits of about £500 but the interest rates can be extortionately high — as much as 19.9 per cent with Barclays.
Instead, it is possible to increase your authorised borrowing by arrangement with most banks, although the extra amount they offer will incur slightly higher interest charges.
NatWest stands out as the one bank that does not charge any additional interest on authorised overdrafts, but students who bank elsewhere will be charged between 7 and 10 per cent for the privilege.
You will receive interest on your balance if you are in credit but this is neglible — at a maximum of 3 per cent with Smile.
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Choosing a bank that has a branch near campus is also worthwhile because personalised customer service can make a big difference to your ability to manage your money.
Michelle Slade, personal finance analyst from moneyfacts.co.uk, says: “Most banks support a specialist advice service, with dedicated staff trained in managing student and graduate finances, so it may be worth considering a bank with a local branch.”