Ensure a degree of success in handling student finances

Many students will be preparing to leave home this month and head off to university. Finance may be far from their thoughts and yet this may be the first time they are fully in charge of their money with budgeting and bill-paying becoming a necessary evil.

Rarely is personal finance taught in schools. Yet the successful university applicants – a new high of 670,000 according to the admissions service UCAS – will have to learn fast.

Do not rely on funds from the Student Loans Company arriving on time. It often misses the date by when students should receive its financial help.

Everyone on an eligible course qualifies for 72 per cent of the maximum loan, regardless of income, with the balance income-assessed. Loans comprise the tuition fee and maintenance help. The money should be paid directly at the start of each academic term.

The loan does not have to be paid back until the student leaves higher education and is earning £15,000pa or more. It is then repaid through the tax system. The interest is calculated on the rate of inflation. For the period September 2010-August 2011, the rate was 4.4 per cent as RPI stood at this level in March last year.

With unreliable timing as to when such a loan will arrive, it’s vital to have a current account already in place before leaving home. A cheque book, debit and possibly credit card take time to come through.

Banks on or close to university and college locations will become stretched for four to five weeks from late September and so use the time now to compare different packages and open the most appropriate account for your needs.

As most students spend their college life living on an overdraft, the key elements to look for are:

n amount that will be advanced interest-free;

n interest rate on further authorised borrowing.

Halifax (part of HBOS) offers an interest-free overdraft from year one, which at £3,000 is the most generous on the market.

Many other accounts offer a tiered system with the amount that can be borrowed increasing each year, such as from £1,400 to £1,700 and £2,000 in the third year with the Co-operative Bank.

To persuade students to budget properly, some banks increase the overdraft limit on a termly basis. NatWest and the Royal Bank of Scotland, for instance, offer up to £500 in the first term, £750 in the second and £1,000 for the summer term. Michelle Slade at comparison site Moneyfacts gives a warning, “Some of the higher overdraft limits are quoted as ‘up to’.

“The level of overdraft offered will be credit scored and if you don’t fully match up to the criteria, you may be offered a lower limit.”

Banks that offer ‘up to’ include Barclays (with £2,000 maximum throughout), Halifax, NatWest and RBS (rising from £1,000 to £1,500 in the third year). HSBC grants a formal £500 interest-free overdraft on opening the account and will consider increasing the level to £3,000.

Banks which automatically grant such a facility, apart from the Co-op, are Lloyds TSB (£1,500 for three years), Santander (tiered from £1,000 to £1,500) and Smile (£1,000 rising to £1,400 and then £1,800).

Those on longer courses can enjoy higher limits in their fourth and fifth years with some accounts: Lloyds TSB (£2,000), NatWest/RBS (£1,750 and £2,000), Santander (£1,800 and £2,000) and Smile (£2,000).

Clydesdale and Yorkshire Bank – both owned by National Australia Bank Group – have student packages but with no interest-free overdrafts.

If the combination of an interest-free overdraft and a loan from the Student Loans Co prove insufficient, the next crucial question is which account offers the lowest authorised overdraft. HSBC has the lowest at 3.5 per cent ABR, followed by Halifax at 7.2 per cent.

Higher rates are charged by Clydesdale/Yorkshire Bank (7.49 per cent up to £1,000), Barclays (8.9 per cent) and Co-op Bank/Smile (9.9 per cent). Lloyds TSB charges 8.21 per cent but additionally £5 per month usage fee if £10 buffer is exceeded.

To have a large sum available at the start of term may prove tempting and so practice setting a weekly budget to ensure there is sufficient money to live on throughout the term. Whilst in credit, the interest is low but still an incentive to keep money back (1.98 per cent in the first year at HSBC).

Do not be drawn into borrowing on an unauthorised basis. Banks have penal rates to discourage such behaviour, such as 15.9 per cent EAR (Co-op Bank), 24.2 per cent plus £28 monthly fee (Halifax) and can reach 29.9 per cent EAR (Clydesdale/Yorkshire Bank).

A credit card may be offered but it is probably sensible to resist, even though the limits available are low for students. If you have no regular income to repay a debt, then even a few hundred pounds can soon escalate as interest charges mount up.

If a student gets into trouble with their finances, don’t bury your head in the sand. Speak immediately to the bank and also a college welfare person. If you tackle such an issue head on, banks will be far more lenient and willing to help.

Many branches at or near university campuses have specially trained staff to give advice, which can be invaluable in helping to manage money.

Incentives are offered by most banks to tempt students to open an account but these should be regarded as a perk and not the reason for selecting one.

The best carrot – a five year young person’s railcard, worth £140 – has been withdrawn by NatWest to new accounts.

Barclays have special deals with Phones4u whilst HSBC has a generous free worldwide travel insurance policy for two years plus 25 per cent discount off 500 Lonely Planet titles. Halifax gives a discount on vehicle breakdown cover and commission-free travellers cheques and currency.

Lloyds TSB have discounts at selected stores and free YHA membership for three years in addition to free music downloads.

NatWest and RBS offer a discount card on shopping (such as 3 mobile, New Look and STA) plus discounts on laptops. Its emergency cash scheme could be useful where up to £300 can be withdrawn from any cash machine.

Santander gives insurance for a laptop, gadget and mobile phone when £500 is credited each term.