Students: they're like a red rag week to a bull at the banks

Forget the marketing ploys. Get a good deal on overdrafts

Since putting their pens down on their A-levels, teenagers across the country have been out celebrating. But soon the day of reckoning will come into view - 17 August, when they find out the results that will determine their future. And if they do get the grades to start visualising university life, those dreams may be tarnished by worries over loans, tuition fees and the rapidly increasing cost of living as a student.

The average graduate debt for 2005 stood at £13,500, according to Barclays, and that figure can only rise from this September, when universities in England will be able to charge up to £3,000 a year in top-up tuition fees to all new students.

Undergraduates can apply for the new Student Loan for Fees, as well as loans to cover living costs, and these won't have to be repaid until they are working and earning more than £15,000 a year. There are further grants and bursaries available for those from lower income households.

And last week, the Higher Education minister, Bill Rammell, announced new measures to "simplify the delivery of student finance", to be phased in during the 2009-10 academic year.

This will mean students can apply for loans and grants online at the same time as applying for their place at university.

In the meantime, however, those planning to go into higher education this autumn should be thinking now about how they are going to manage their finances - and who they will entrust with their money.

The banks have already begun cranking up their marketing in a bid to get this year's crop of undergraduates through their doors. They will continue to do so in Freshers' Week and beyond. Students may not have much cash to spare while they are studying, but the banks are keen to lure in the next generation of what are regarded as relatively low-risk debtors but potentially high earners.

They hope that by being generous to customers during their student years, they will encourage them to stay loyal in the future - first as graduates, then as working adults on good salaries - and later to buy expensive mortgages, loans and insurance policies.

"Students are valued because they are viewed as lucrative long-term customers," says Stuart Glen - dinning from the price-comparison service Money-supermarket.com. "Banks will make little profit out of students; payback will start when they graduate."

Because they will only have just started work, he adds, and will be tenants rather than homeowners, graduates won't have had the chance to build up a good credit profile. "This will limit their ability to shop around, locking them into accepting deals with the bank that has supported them through university."

One of the main marketing ploys is the offer of freebies if undergraduates open an account. Leading the way are HSBC, which is trying to tempt students by dangling a video MP4 player, and Lloyds TSB with the promise of an iPod Shuffle. NatWest is offering a five-year Young Persons Railcard, and Barclays a three-year National Express Coachcard.

On top of these initial incentives, many providers are offering discounts at selected shops on "student essentials" such as books, music and clothes - as well as commission-free currency.

However, it's important to look beyond these incentives to the most critical features of any student account: the level of the interest-free overdraft; the rate of interest earned on balances in the black, and paid on balances in the red; and any charges levied.

Of these, the first priority should be the interest-free overdraft, which usually increases year on year.

"The Co-operative Bank and Lloyds are two of the few providers to have increased their one-year interest-free limits," says Lisa Taylor from the financial analyst Moneyfacts.

For the first year, Lloyds and the Co-op are now offering £1,500 and £1,400, respectively, compared with £1,000 at HSBC and Barclays. However, Ms Taylor says the best overdraft package is offered by the Halifax, where undergraduates can borrow up to £1,750 in year one and £2,100 in year three.

You should also find out whether your bank will be prepared to increase your overdraft later in the academic year - and what happens if you need to exceed your limit.

Dipping further into the red without authorisation can prove very expensive, so make sure you are aware of the charges for doing so. HSBC offers the lowest rate of interest at 14.8 per cent; it rises as high as 32.9 per cent with the Co-op.

Mr Glendinning urges students to try to avoid getting into this situation. He adds that many banks will consider extending an agreed overdraft if you ask.

You also need to look at how much interest you earn when you're in credit. Most banks pay a paltry 0.1 per cent on account balances in the black, and the Co-op pays nothing, although its online bank, Smile, is paying 3.04 per cent. But Ms Taylor points out that as the majority of students won't ever be in the black by much, if at all, this is not really much of a benefit.

As well as looking at the student package, you should check what will happen when you graduate. Most banks should give you an interest-free overdraft for at least a year.

Philippa Gee from independent financial adviser Torquil Clark adds that many people end up staying with the same bank for the rest of their lives. So it's vital to make an informed choice at the outset.

"The decision you make as a student cannot be based on the immediate package. You must also consider whether the bank looks after all its customers in terms of ongoing competitive deals and a good range of facilities.

"If not, you could find yourself stuck there for the next 40 years - ripped off with high charges and inflexible accounts."

Many people, she adds, insist they will switch accounts when they have finished studying. "But this just doesn't happen as they feel they are tied in with overdrafts, loans and credit cards which they then carry through to their working life."

More immediately, undergraduates should also ensure they will have easy access to cash and any other essential banking services on their campus or near where they live. Not only will a local branch offer convenience, it may provide specially trained student advisers.

An iPod alone isn't enough

Emma Waldron, 18, from Lingfield, Surrey, has just finished her A-levels and is now waiting to find out if she has made the grades to take up a place at Durham University studying politics.

She has already begun thinking about the financial implications of going into higher education - especially with the introduction of top-up fees.

"I have thought more about which bank to choose in the past few days, since I received a letter from Ucas (the Universities and Colleges Admissions Service) which included promotional material from one of the banks," she says.

"I know Lloyds is offering an iPod Shuffle, and NatWest a railcard, when you open an account. But I think it's more important to find out what the banks are offering in the longer term."

Emma plans to shop around for her account, choosing one that offers a large interest-free overdraft for three years, as well as branch facilities and easy access to cashpoints in the city centre - though she also plans to do her banking over the phone and internet.