Midweek Money: Banks want your money - so take theirs

Who'd have thought becoming a student could improve your financial situation?
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The Independent Culture
Ten or fifteen years ago, the relationship between students and their bank could be fraught with difficulties, particularly on the overdraft front. Go more than pounds 100 or so overdrawn and you could almost guarantee a stroppy letter from the manager - for which you were then charged.

Today, everything is different. Banks positively fall over themselves to offer students an overdraft, sometimes running into four figures. The reasons for this change are not hard to find. First, student debt is a far more "acceptable" feature of college life. The gradual whittling down in the value of, and now, the outright abolition of student grants has made college-goers far more dependent on state loans to keep going. Banks see themselves as part of that equation.

This is probably just as well. Midland Bank's Degrees of Debt survey earlier this year found that more than half of sixth-formers' greatest concern is money, while 70 per cent expected to borrow during their student days. In reality, Midland points out, 92 per cent will be in debt by their third year.

If anything, owing money is now seen as a sensible thing to do. Jenny Loynds, head of student banking at Barclays, believes: "Students are becoming increasingly realistic about the cost of going to university. The percentage of students owing money has risen from 80 per cent in 1993 to 88 per cent today."

Moreover, banks have discovered that, despite the sometimes mastodontic scale of their overdrafts, barring a few exceptions most students pay them off as soon as they start work. It may take a year or two, but once in the world of work ex-students will soon be earning enough to pay off their debts. And a sense of middle-class probity will ensure they do so, even though it may cause hardship for a long time - the average debt is pounds 3,800 and the expected repayment time is five years, according to Midland; pounds 2,960 according to Barclays - after the overdraft was incurred in the first place.

Finally, banks know that if they catch their clients young and cosset them when at their most vulnerable, eventually these same clients will generate a healthy income stream for many decades. Student overdrafts are an investment for the future for both banks and their clients.

So what are banks prepared to offer their teenage customers? Each bank's package differs slightly, although the most common feature is the free overdraft.

NatWest is prepared to offer a pounds 1,000 overdraft in years one to three, with pounds 1,500 in year four and pounds 2,000 in years five and beyond. However, the bank insists this is not automatic, and all limits are assessed on an individual basis and discussed between the student and an adviser.

However, NatWest does not rest there. It also gives those opening one of its student accounts before 30 November a cash gift of pounds 35 (plus a further pounds 15 if the account is opened at one of the bank's "specialist" student branches). Or it will give an BT EasyReach pager, which has no connection fee and on which the student pays nothing for messages.

Midland's package also involves a pre-agreed, interest-free overdraft of pounds 750 in year one, pounds 1,000 in year two, pounds 1,250 in the third year, rising to pounds 1,500 in subsequent years. This is less than NatWest offers, but Midland also gives students a free, four-year Railcard, worth pounds 72, or pounds 50 in cash.

What is more, additional borrowing is 1 per cent over base rate, while its fee-free credit card will charge only 11.9 per cent APR for the first 12 months - subject to a maximum pounds 500 spending limit. Midland claims its Railcard deal can save students hundreds of pounds more on travel, and cites the cost of a return ticket between London and Manchester - pounds 46.50 with a standard saver ticket and pounds 31 with the card - as an example.

Lloyds offers a pre-agreed overdraft of pounds 750 in years one to three, which is potentially extendable to pounds 1,000. Thereafter, the pre-agreed limit is pounds 1,500, with a possible extension to pounds 2,000. All new account openers also receive pounds 35 in cash, plus a further pounds 5 if their parents also bank at Lloyds. Agreed extra borrowing is at a lower rate - 7.4 per cent - than Midland's, and students' fee-free Mastercard charges 16.4 per cent APR for six months, returning to 22.9 per cent APR thereafter.

Barclays Bank's interest-free overdraft package is up to pounds 1,200 in year one, rising to pounds 1,400 in year two, pounds 1,600 in the third year, pounds 1,700 in the fourth and pounds 1,800 in the fifth. Interest on agreed loans above that is charged at 1 per cent over the base rate. Plus, the bank offers free Internet banking 24 hours a day, 365 days a year - this benefits anyone who has access to the Net while they are at college.

Its fee-free Barclaycard is not such good value, charging 18.9 per cent with a limit of pounds 350. But Barclays' piece de resistance is the offer of a Cellnet EasyLife mobile phone worth pounds 119.99. There is no line rental with this phone and incoming calls are free of charge. There is also no disconnection fee. However, calls are charged on a pre-paid basis at 49 pence per minute and at least pounds 320-worth of calls must be credited to the phone every 120 days. (This can be carried over once.) Students receive pounds 20-worth of free calls when they buy their first pounds 20 of call time. The phone also has Voicemail message facilities, charged at 49 pence a minute.

Jenny Loynds at Barclays says: "The whole package is designed to encourage students to take control of their finances - using technology such as the Internet, the mobile phone as well as our realistic overdraft facilities."

As well as the big banks' success in attracting students, some present and former building societies have done the same. Halifax, in particular, has won student customers by offering them a pounds 1,000 a year interest-free overdraft for up to six years (one year after graduation), plus agreed overdrafts of 7.9 per cent EAR (Equivalent Annual Rate). Halifax also offers a telephone banking service, commission-free travel money and a cash card.

Despite the attractive packages on offer to students when choosing their accounts, the fact remains that, for many, the key is not the deal on offer while they are at college but what happens when they leave.

The first few years after studies have ended can be tough, and newly- graduated-students need all the help they can get during that period. This is a subject to which we will return next week.