Students should avoid learning financial lessons the hard way

Fresher. The word has an agricultural sound; like a crop ripe for harvest, or a spring lamb ready for slaughter.

More than 400,000 freshers have now arrived at universities and colleges up and down the UK. They have huge loans at their disposal but primary school levels of financial know-how. Little wonder that the less scrupulous sectors of the finance industry are already sharpening their knives.

Student loans are paid out in three termly “lumps”, whereas expenditure (rent and bill payments) are usually monthly. If students can’t budget for this, a cash flow crisis awaits.

Last year, it was the payday lenders waiting to cash in on the innocence of the lambs, claiming their first victims long before Christmas. Since January, their ability to operate has been severely curtailed. But new breeds of instant online loans are now appearing, offering interest rates of around 49 per cent a year to those students who can manage to persuade parents or other relatives to act as their guarantors. Unwary guardians may find themselves paying out large sums next year for loans they may not have realised they had agreed to guarantee.

The banks were out in numbers at Freshers’ Weeks throughout the country, luring students in with accounts offering interest-free overdrafts of up to £2,000 and rail and coach travel cards. Smiling like good shepherds, they encourage new students to “build up their credit profiles”. Credit cards are mostly free — but only if the bills are paid in full each month. One slip and the fresher could be facing interest rates of 40 per cent or more on the balance. Getting on the electoral register is a cheaper way of getting a credit profile; it also gives students the chance to vote.

This is the first year that the new school maths and citizenship curriculum, introduced last September in England and Wales, will be put to the test. The aim was to give schools the chance to equip young people with the knowledge and skills they need to manage their money. But there is little that can prepare them for the scale of spending they must control.

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The rent for university halls of residence is payable up front, costs more than £1,800 per term on average in London and can be a lot more. Over the full year, this adds up to more than £5,400. Assuming you have borrowed the maximum student maintenance loan of £8,000, this leaves less than £2,600 — £50 a week — to cover food, travel and other costs such as mobile phone contracts.

Things are worse still for students in private halls of residence, which may offer en-suite bathrooms and bright new accommodation, but tend to require renting for more weeks a year and typically cost £289 a week for a London studio flat — more than £14,000 for the full year.

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Many universities can no longer offer every first-year student a place in a university-run hall. Freshers are forced to compete with non-students for places in shared houses and flats. These require big deposits — sometimes up to three months rent in advance — and they also need to budget for electricity, gas, water and broadband bills. It is vital that one student does not agree to pay all the bills and claim it back from his or her housemates as any debts will be in their name alone.

Insurance cover is also vital. Most students arrive at university with lots of electronic kit. Parents should check whether their household insurance policies will cover these expensive items for students at university. Most will not. And to lose a laptop can be doubly disastrous if the work it contains is not backed up.

It is little wonder that many students fail to make their money last until the end of the first term, even if they spend all their time studying and little time socialising. Budgeting does not come naturally and the temptation is to splash out early in the term, leaving nothing left as Christmas approaches with the pressure of paying for expensive journeys home and presents for family and friends.

A significant number of students will spend their first term’s maintenance loan by the end of October and feel so embarrassed at their childish inability to budget that, instead of asking their parents to help out, they seek loans from friends or financial institutions.

Last year, one high-flying Edinburgh University sciences student I know from a modest background found himself unwittingly keeping up with his much richer flatmates during his first term. He did not notice how much he was spending. By November, he was forced to apply for a discretionary fund grant to cover his shortfall. His father helped him fill in the application, insisting that his son put all his weekly income and expenditure on an Excel document so that he could monitor it from home.

However, the student’s debt was so great, he was forced to take a part-time job to cover his costs. His academic studies faltered. By the end of the year, he had slipped so far behind he was forced to take his first year again.

Some get that balance right. One former astrophysics student I know worked as a GCSE and A-level science tutor earning up to £40 an hour while at St Andrews University. With his students’ success, word-of-mouth spread and his income increased. Music students are also in demand. One Sussex graduate I met recently earned £15 an hour coaching piano students.

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Neither of these students had tax deducted at source because they were self-employed. However, the majority of working students have income tax deducted if they earn more than £204 in a week and national insurance of over £155 a week.

It is not surprising that many recent graduates I meet at financial workshops have questions about the long-term consequences of their student debts or those incurred by housemates, but technically in their name. They want to know if unpaid gas bills or unpaid credit cards will blight their credit profiles for years to come. The answer is yes . . . but only for seven years. After that, the debts are wiped from the record.

Of course, parental contributions are also a vital part of a student’s finances. Some lucky students have parents who can help more than most with living costs. The massive £33bn being loaned in buy-to-let mortgages this year is being boosted by some parents who buy properties in university towns for their offspring and act as landlords to the other students who share it with them.

Even London was once accessible for parents buying to let. It is still possible if you are cash-rich. One couple I know bought a rundown house in Hammersmith for £407,000 18 years ago to provide a home for their daughter as she worked her way through medical school and in her early years of being a hospital doctor.

Over the years, the house has been rented out and gradually improved. Last month, it was finally sold for a little over £1m. After taking all the building costs into account and using the couple’s two capital gains tax allowances, about £130,000 of tax was paid, leaving a profit of £370,000, which the couple gave to their two daughters as deposits for their first homes. Two problems solved with one investment.

Lindsay Cook is co-founder of MoneyFightClub.com which offers online resources and workshops to consumers. She is also co-author of “Money Fight Club: Saving Money One Punch At A Time”, published by Harriman House.

Student checklist — managing your budget at university

Make a budget plan

Estimate your income and expenditure — if you can’t make your own Excel spreadsheet, download a free one from SavetheStudent.org. Fill in all your fixed costs — rent, bills, travel — and work out what you have left to spend per month after these.

Bank online

Don’t wait for a monthly bank statement — online banking means you have no excuse for not keeping on track of your finances. Banks commonly offer free text alerts if your balance gets near to your overdraft, or when large sums are paid into / paid out of your account. Sign up for these.

Ration your spending

To make your cash last, consider keeping your loan (which is paid termly) in a savings account, then withdraw a fixed monthly amount into your current account.

Keep on track

Make sure you know the dates that student loans or other income (such as contributions from parents, or a part-time job) are supposed to be paid into your account, and check that they have been. The same goes for big bill payments (rent being the most obvious). University halls commonly collect termly rents after loan payment dates — private landlords have no such obligation.

Book your train ticket home for Christmas today

Don’t wait until the week before Christmas to book the train home. If you book it now, you can secure an advance fare for a fraction of the cost — and still get a further third off using your student rail card.