Ask Gareth Shaw: Is a graduate account the best option to help my son clear his overdraft?

Question: My son is graduating from university this month, and despite the pubs being closed for much of his final year, he has ended up with a maxed-out overdraft. He’ll be looking for work when he comes home, and I’ll be ensuring he clears his debt. Would switching him to a graduate account be the right thing for him, given that we aim to have his overdraft paid in full within a year?

Graduates have some choices to make about who they will bank with now they are no longer students
Graduates have some choices to make about who they will bank with now they are no longer students

Answer: Don’t be too hard on your son – I can’t imagine what an odd and deflating experience it may have been for him to graduate during a global pandemic and not be able to celebrate the fruits of his efforts at the end of it all.

The good news is that there are plenty of options to minimise the cost and stress of the debt your son has built up. Student bank accounts, one of which I assume he has, are attractive because they offer interest-free borrowing throughout the years of higher education. But switching onto a graduate bank account means there isn’t a dramatic cliff-edge of high interest rates facing your son when he is no longer a student.

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Graduate bank accounts maintain the offer of an interest-free overdraft for two or three years after graduating, but the amount that is interest-free reduces each year. The theory is that once the account-holder is earning, they can pay their debt down in line with the terms of the account, spreading repayments over time.

The market for these accounts isn’t uniform. For example, Nationwide’s FlexGraduate account offers a £3,000 interest-free overdraft in the first year after graduating, reducing to £2,500 in the second year, £1,750 in the third year and £1,000 thereafter. This means you’ll need to have paid off £500 in the first year to avoid interest. On the other hand, Santander’s Graduate account gives a £2,000 interest-free overdraft for two years, which means that you don’t have to worry about making a certain level of reductions in the first year. In the third year, however, the interest-free overdraft disappears – so you’ll need to pay off all your debt in 24 months.

Most banks that offer student accounts also operate graduate accounts, and he should be switched automatically to a graduate version. But that shouldn’t stop him from switching to an account that has a better overdraft offer. And contrary to what many think, being overdrawn is not a barrier to joining a new bank. A bank may see a graduate as a customer of the future – I have ended up taking multiple mortgages with the bank that was my graduate account provider – and welcome them with the offer of an interest-free overdraft.

The key here will be making sure that the new account will cover the same overdraft as your son’s existing bank. The student bank account provider will require the debt to be paid off within a couple of days of closing the account, so you need to be sure that you will be able to borrow the equivalent amount from the new bank.

A word of warning – these accounts have been designed to help graduates pay off their student debt. Failing to do so when moving from one interest-free tier to another will mean that any borrowing above the interest-free amount will be subject to interest. Rates for overdrafts can be as high as 39.9 per cent EAR

However, thanks to rules introduced last year, banks cannot charge daily or monthly fees when you go overdrawn and should be proactive in contacting a customer about their overdraft.

When the term on the graduate account ends, the bank will likely move your son onto one of its fee-free accounts. At this point, he should be looking at the market to see if he could get a better deal elsewhere, based on how he uses his account and the perks that are most attractive. It takes just seven working days to switch accounts using the Current Account Switching service.

Find out more about graduate bank accounts at here.

Gareth Shaw is the Head of Money at which.co.uk

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