Debt alert: don't join the university of hard knocks

As freshers sink their first pints, Laura Howard shows how to avoid a financial hangover

It's Freshers' Week at many British universities and making friends and drinking alcohol will be the priorities for the new intake of students. But drawing up a realistic budget and sticking to it should not be neglected, because getting into deep debt is the worst hangover of the lot.

That you will be a borrower at university is inevitable, says David Malcolm, finance policy officer at the National Union of Students (NUS). "Tuition fees alone are now £3,072 a year and students need to live and pay rent too. So unless you are from a wealthy family, debt is a given."

But opting for the right debt is paramount. Student loans are the least onerous as the interest rate is low (currently 4.8 per cent) and linked to inflation. And repayments kick in only when you start working and even then are deducted at source, which means it is difficult to fall into arrears.

The other benefit is that student loans have no bearing on your ability to borrow in the future. "The Government does not allow the Student Loans Agency to share data with credit-reference agencies," says Mr Malcolm. "In short, in so far as you can get good debt, this is it."

These loans currently account for an average £9,112 of graduate debt on leaving university and are taken out by 90 per cent of students, according to the NUS.

Student overdrafts, being interest-free to a given limit and non-repayable while studying, also represent a fairly risk-free form of borrowing. But if your track record with money suggests you are likely to exceed your agreed limit, at least choose the most appropriate account. NatWest, for example, takes a comparatively sympathetic approach to spendthrifts, levying an interest rate of 17.81 per cent on funds that have not been agreed, compared with the Co-op's 32.92 per cent.

Students who go over their limit run the risk of having it referred to their bank's debt-collection department, and this can be expensive. Customers of the Halifax, for example, can lose the right to an interest-free overdraft. They are also hit with a 24.2 per cent rate on their unauthorised borrowing, as well as other charges for letters and the referral of the debt to the collectors. "But this situation is very rare," says Jason Clarke, spokesman for the Halifax. "The student has to be almost wilful in not answering letters and ignoring phone calls."

Students often qualify for unsecured personal loans as well, even though they don't have a stable income. "The way the lender sees it, they will probably get the money eventually," says Mr Malcolm. But unless you can meet the minimum payment every month throughout your studies, and probably beyond, a personal loan can be dangerous. "Failing to make payments on time can put a black mark against your credit rating which will stay there for up to six years," adds Mr Malcolm. "This can have a big impact when, for example, you come to apply for a mortgage."

This is also the case with credit cards. Unless you can trust yourself to clear the balance in full each month, and not just meet the minimum repayments, this type of borrowing can cost you dearly as the interest accrues. Lloyds TSB, for example, has a student credit card with a £350 limit but an annual percentage rate (APR) of 19.9 per cent on the debt.

Store cards, which often charge APRs of 30 per cent and beyond, should be avoided at all costs. As Mr Malcolm explains, it's "all too easy for a balance to build up".

If you get into hot water, contact your student union, which will help set you straight, says Mr Malcolm. The university is also likely to have a hardship fund for those who are thinking of leaving for financial reasons.

A tutorial in finance: how to keep your head above water

Get a job early: The first year of your course is when you are likely to have the most spare time, so make use of it and earn some money.

Keep credit cards for emergencies only: This expensive form of borrowing should not be used for general spending.

Avoid high-street store cards: With interest rates of 30 per cent or more, this plastic is a luxury you can do without.

Keep in contact with your bank: If you run into trouble, ask whether you can extend your overdraft limit.

Apply for a hardship fund: If you are in real financial trouble, non-repayable funds should be available direct from your university to help you continue your studies.

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