Accounts that add up to carefree study

Anxious parents with children waiting for A-level results on Thursday will be preparing themselves for the possibility of having to finance their son or daughter through university.

Tuition fees and the end of maintenance grants means the burden of debt on students is heavier than ever. The typical student entering university this year will graduate with debts of £13,680 in three years’ time, according to the latest Student Money Matters report from NatWest.

One way to keep debt to a minimum is to choose the right student bank account for your son or daughter. But with banks and building societies falling over themselves to capture a slice of the student market the choice is bewildering.

Continuing with tradition, the big banks all offer tailor-made student accounts, many of which include incentives such as free mobile phones, pagers, railcards and CD discounts. But financial data provider Moneyfacts says there have been changes in the type of benefits on offer from banks this year.

“Rather than simply concentrating on gimmicks and special offers, providers are finally waking up to the idea that students are becoming financially savvy and want the best interest rates and overdraft rate on their account as well,” says Samantha Owens, research editor at Moneyfacts. “They have increased their overall package and are concentrating on offering better financial rates on the accounts.”

This means that the size of interest-free authorised overdrafts and the penalty rates that some banks charge on unauthorised borrowings are two of the most important facilities to check.

“It is crucial that students take into consideration overdraft rates and limits,” says Owens. “The potential savings on these could mean that you could possibly buy one of the advertised ‘freebies’ and still have cash to spare,”

Student accounts tend to offer interest-free overdrafts to certain limits, usually increasing year on year, although some – such as Bank of Ireland – do not offer this facility at all. It is also important to look at the authorised and unauthorised overdraft interest rates as these range from 0 per cent to more than 30 per cent.

Some of the benefits available are virtually worthless, says Owens. She points out that, “some accounts are paying interest of over 3 per cent on credit balances. But with the majority of students unlikely to find themselves with a large credit balance, it does raise the question as to whether this really is much of a benefit for the student population”.

A student lucky enough to maintain an average credit balance of £500 for a year would earn just £15 at 3 per cent.

Halifax is making a clear bid for undergraduate business, offering an interest-free overdraft of up to £1,750 to first-year students and up to £2,100 by the time they have reached their fourth year. Beyond this, Halifax has a relatively competitive overdraft rate for agreed borrowings of 7.2 per cent, but students who go over this limit will be charged at a rate of 24.2 per cent for unauthorised borrowings.

This highlights how it is important to check not only the level of any interest-free overdrafts but also borrowing rates for agreed and unauthorised overdrafts.

NatWest and Royal Bank of Scotland offer interest-free overdrafts of up to £1,250. NatWest has a lower penalty interest rate for unauthorised borrowing at 17.81 per cent compared with RBS at 29.84 per cent. NatWest also offers a five-year Young Person’s Railcard worth £100 and commission-free travel money. This might be considered better than Halifax’s discounted travel insurance and commission-free foreign currency.

If you go over your interest-free limit with some banks you can still avoid paying extortionate rates of interest. Barclays will allow you to be up to £3,000 overdrawn in your first year, of which the first £1,000 is interest-free and the next £2,000 is charged at 8.9 per cent. But if you accidentally exceed your limit, Barclays will sting you for 27.5 per cent on these borrowings. In most cases, however, authorised overdrafts are negotiable and will depend on levels of monthly spending and the student’s other debt.

The moral is to avoid slipping into the red without warning the bank. Most banks require a few days to arrange an authorised loan. Abbey will contact students hovering just above the agreed overdraft limit.

“Research shows that most people stay with the same bank for decades, so it makes sense for them to attract customers at a young age and students are particularly attractive to banks as they generally incur huge debts throughout their time at university but have a large earning potential,” says Veronica King, vice- president of welfare at the National Union of Students.

“Students need to ask what the bank is offering you in the long-term?” she says.

It may also be worth checking what facilities the bank offers when you graduate. “Some banks have graduate accounts with lower interest rates and low- interest starter loans that graduates can take advantage of for up to five years after they leave university,” says King.

Some, such as Bank of Scotland, Co-op, Midl+and, Royal Bank of Scotland and TSB, extend their student concessions for 12 months after the degree ceremony.

Some banks take student advice more seriously than others. Barclays has around 150 student advisers.

Once you have come up with a banks shortlist, only then should you start to weigh up whether a free curry meal and commission- free travel money from Lloyds TSB is a better bet than a free five-year railcard offered by NatWest.