Freshers must pass student debt test

Published on Sunday 21 August 2005 00:29

RECORD numbers of young people in their 20s in Scotland are being pushed into serious financial trouble by student debts of up to £13,000, according to Citizens Advice Scotland.

Making careful choices, such as the right bank account, can help keep graduation debt to a minimum. So here's our guide to what freshers should look for in this year's student accounts.

Gimmicks and giveaways

Every year the banks bring out an array of freebies to entice students attending freshers' fairs to their stands and, ultimately, in through their doors. In the past these have included everything from free curry and CDs to discounted bus and train fares.

The free mini fridge on offer to those signing up for Lloyds TSB's account this year might be just be the thing to impress a new flatmate. Other incentives include free railcards and book vouchers, and there's even free cash being given out by Abbey (20) and HSBC (50).

But none of these should blinker students from examining the other financial implications of the accounts on offer.

The devil is often in the detail, and it can make all the difference to the management of a student account and the level of debt incurred.

Overdraft limits

Almost all the main banks now offer interest-free overdrafts which increase in line with the year of study. Final year students, the banks reason, will have to spend more time studying and will be less able to take on part-time work.

Typically the banks offer 1,000 in year one, rising to 2,000 in the final year. Royal Bank of Scotland promises slightly more to this year's freshers: 1,250 climbing to a maximum 1,800 over four years, while Bank of Scotland is offering 1,750, rising to 2,100 in year three.

Students should look at what banks will charge for authorised borrowing beyond their free overdraft limit. Bank of Scotland charges 7.2%, Lloyds TSB 7.4% and Royal Bank of Scotland 9.4%. Clydesdale charges 5.64%, but the account has no interest-free overdraft.

The best of this year's overdraft rates is HSBC's. It charges 1% above Bank of England base rates (currently 5.5%) for authorised borrowing and 14.8% for unauthorised borrowing, compared with around 28% charged by the other banks.

Interest when in credit

Students who go into overdraft at some point during the academic year might well start each term with a healthy bank balance.

In this academic year, Scottish students studying in Scotland and living with their parents will be entitled to a loan of between 545 and 3,320. Those living on campus or in rented accommodation will get between 830 and 4,195. Students heading to university in England get slightly more, with those studying in London allowed most - up to 5,175.

That's quite a lot of money to be sitting idle in a bank account. According to independent financial information group Moneyfacts, only five of the banks offering current accounts to students this year pay more than 1% on credit balances.

Abbey is offering 1.49%, RBS 2%, Bank of Scotland 2.5% and internet bank Smile 3.25%. Best of the bunch is the Clydesdale Bank, offering 3.5%, but as mentioned above, the account comes without a free overdraft facility, which may sway the decision.

Free access to your money

Every penny counts for cash-strapped students, so it makes sense to ensure money is not given away needlessly. The main banks have reciprocal agreements that allow each other's customers to use cash machines free of charge.

But not all banks do this, and the number of fee-charging cash machines is on the rise. A worrying number of dispensers on campuses charge, and students should avoid these.

Linked credit cards

Some student current accounts come with access to a credit card. from the same financial institution.

While it can be hard for students with little or no credit history to get a card elsewhere, students should check the interest rate offered before signing up. There may well be cheaper borrowing available elsewhere.

According to financial website Moneysupermarket.com, Lloyds TSB and Barclaycard have interest rates of 17.9%, while RBS and HSBC cards charge 18.9%. All of these offer authorised overdrafts at considerably lower interest rates.

Case study: Student uses his loaf to help make ends meet

PART-TIME baker Ryan Ferry knows all about dough when it comes to cakes and pastries - but he's not so good at the paper kind.

About to start his second year of a computing course at Abertay University, he admits he found the financial side of student life daunting. Ferry remembers being drawn to the Lloyds TSB stall at last year's freshers' fair.

"A lot of banks had stands but the people on the Lloyds stand seemed better in what they were offering. They said I could use internet banking instead of going into the branch all the time," he says.

"University life has not cost as much as I feared, but it has still been more than I planned for and it will probably get worse as I go on."

Ferry, from Dundee, borrowed 1,000 interest free on overdraft last year. His overdraft limit has just been raised to 1,250 in time for the start of his second year.

He likes that fact that the Lloyds overdraft is graduated, he says, because if he had been given access to more money in his first year he would have been tempted to spend it.

The 19-year-old has helped keep costs down by living at home with his parents, and working part-time in the bakery at his local Tesco store.

He says: "It's good that I have the job because it means that if I spend too much, I can work extra hours and pay it back a bit quicker."