A-level results are in – now for the big financial test
Thousands of young people will be heading for university in just a few weeks. Time spent managing finances now can pay dividends for years to come. Chiara Cavaglieri and Julian Knight report
Sunday 23 August 2009
For the hundreds of thousands of young Britons who collected their A-level results, last Thursday was a red letter day. The nervousness and waiting would have been worth it for some as they now prepare to take up the university places they set their sights upon. Others now face the scramble for places through the clearing system. Whatever the scenario, over the next six weeks, students will have to make some big calls – not the least of which will be financial.
Accommodation has to be rented, current accounts opened and lines of credit secured. The Push student guide estimates that this year's student intake will graduate with about £23,000 worth of debt on average. Borrow this money from the wrong place, at too high a rate of interest, and the consequences can be painful and long lasting. "With such massive debts the norm, students have to learn to budget from day one. They can't afford to let things slide," said Danny Cox from independent financial advisers Hargreaves Lansdown.
News that tuition fees are likely to rise will make coping financially through university even trickier, so here's The Independent on Sunday survival guide for everything from credit cards and bank accounts to bursaries and accommodation.
Student loans and bursaries
English universities and colleges that charge the maximum tuition fees, £3,225 for 2009-10, must offer bursaries of at least £319 for students receiving the full maintenance grant, although many will offer more. Full-time undergraduates who are not eligible for any bursaries will still have access to student loans of up to £4,950 a year, or £6,928 in London, to cover their tuition fees and to help with living costs. Debt owed to the Student Loan Company (SLC) is taken out of a student's salary after graduation at 9 per cent of annual earnings over £15,000. Interest rates are based on the retail price index (RPI) and set in March each year. At the moment, students are paying no interest on their loans because the RPI fell below zero.
For Scottish students, tuition fees are paid by the Student Support Agency and do not need to be repaid. They are also eligible for a living costs loan of up to £4,625. Households with an income of less than £34,195 are eligible for a bursary of up to £2,640 in 2009-10. In Wales, students are entitled to a grant of up to £1,940 a year, irrespective of family income, which does not have to be repaid. They can also apply for a means-tested Assembly learning grant of up to £2,906 for households with an income of less than £39,793.
Picking the wrong current account could start off university life on the wrong financial foot. Freebies shouldn't be the deciding factor. The most important feature for students is interest-free borrowing so, first and foremost, they should check the overdraft limit.
For this year, students wanting to borrow more than £1,500 should take a look at the student accounts from Halifax and Barclays which offer up to £3,000. However, note that these are maximum overdrafts and will typically be approved on an individual basis. Several lenders also offer a tiered overdraft, increasing each year, which may be a useful way for some students to budget more carefully.
The next important feature is the rate at which any additional borrowing is charged. The average authorised overdraft rate currently stands at 8.05 per cent, but there are providers such as Abbey and the Co-operative charging as much as 9.9 per cent. In-credit interest rates are also important for those who think they will be able to maintain a healthy balance. Most offer poor returns, with the average in-credit interest rate at a mere 0.46 per cent and many offering 0 per cent. However, the Abbey student account does pay 2 per cent on balances up to £500. Similarly, unauthorised overdraft rates – the charge for exceeding the authorised limit – can be a colossal 30 per cent.
Most students will be offered a credit card upon opening a student bank account. Many of them are tailored for students, such as the NatWest student card which offers discounts on iPods and computing products and one month's worth of free DVD rentals with Outnow.
Credit cards can be useful for large purchases such as laptops as credit card purchases between £100 and £30,000 are covered by Section 75 of the Consumer Credit Act. Also, some credit cards offer handy rewards such as the American Express Platinum Moneyback card which pays 5 per cent cashback for three months up to a maximum of £100. After this, rates are tiered depending on the amount spent, down to 1.25 per cent cashback. "It's probably the first time they'll be using a credit card regularly so they need to think about why they're using it," says Liz Willder from insurance comparison site Tescocompare.com. "Is it because they can't afford something, or are they using it strategically for protection or some kind of reward?"
In most cases, however, credit cards and personal loans are not suitable for students as, without a regular income to repay the debt each month, even a few hundred pounds can quickly escalate to unmanageable levels. It is far cheaper to make the most of the interest-free overdrafts on offer from student current accounts. Those returning from a gap year may already have credit card debt, in which case it is worth considering a 0 per cent balance transfer card. The best buy on the market is the Virgin Money MasterCard, which charges 0 per cent on balance transfers for 16 months, with a handling fee of 2.98 per cent and 0 per cent on purchases for three months, after which it charges a typical rate of 16.6 per cent APR.
The cheapest option by far is for students to stay at home and go to a university nearby. Halls of residence offer a cost-effective alternative for first-year students and will almost certainly be cheaper than renting from the private sector. There is no liability for council tax in either halls or a house or flat occupied just by students.
Once students are out of halls of residence and are moving into new digs, it is vital to ensure their rental deposits are safe. Landlords are required by law to use one of three tenancy deposit protection schemes to protect their money – the Deposit Protection Service (DPS), mydeposits and the Tenancy Deposit Scheme (TDS).
Utilities and other living costs
Before moving in, students should ask to see a copy of gas safety certificates and establish who is responsible for bills. Meter readings should be taken and given to energy suppliers. If necessary, students should ask their landlords if they can switch to a cheaper utility tariff. If the property will be standing empty for a fair proportion of the year, it would be economical to switch to an energy tariff that does not include a standing charge. In addition, check bills against your own meter readings, as estimates are often more expensive. If possible, avoid properties with a prepayment meter; it is estimated that this is up to 39 per cent more expensive than quarterly billing.
Course materials such as books can cost hundreds of pounds, so consider sharing the cost of pricier texts with other students. Keep an eye out for second-hand books from second- and third-year students and sites such as www.sellstudentbooks.co.uk. For everyday savings, an NUS Extra card costs £10 and offers discounts at several retailers, and websites such as www.studentbeans.com list student offers and deals.
Most students will be laden with all kinds of gadgets and electrical kit that are a prime target for thieves, such as MP3 players and laptops, so it's important to have the correct insurance.
Firstly, students should see if they are covered for free under their parents' household policies. The students' union may also have an arrangement with a specific insurer. Unfortunately, because of the high-risk nature of student accommodation, some providers charge hefty premiums, so it is worth looking into specialist student insurance. According to price comparison service Confused.com, a 19-year-old male attending the University of Glamorgan, living in private rented accommodation with two other adults and no alarm, with £4,000 worth of contents cover including high-risk items such as a laptop, TV and iPod would pay between £206 and £271 a year through standard home insurers, while specialist student insurance from Endsleigh costs only £139. If you're a cyclist, check to see whether you can add cover against theft to your home insurance. Alternatively, specialist cycle insurance is also available through firms such as Cycleguard or from cycle retailers. Be warned, though, up to 400,000 bikes are stolen each year so premiums are generally quite high and on the rise.
Many students opt for third-party, fire and theft cover because they think it's significantly cheaper, but the difference in premiums with fully comprehensive is often small. For example, a 19-year-old student attending the University of Sheffield and driving a Ford Fiesta, fully comprehensive would cost £1,238 and third-party fire and theft would cost £1,196. Remember that moving home can affect premiums and don't be tempted to pretend that the car is still parked at home. It is fraudulent and those caught won't have their claims honoured. Another common fraud is called fronting. This is where parents put their child on the insurance as a named driver but they are actually the main driver. Fronting is illegal and insurers are becoming wise to key indicators that it is going on.
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