How to survive the bills without cutting the thrills

The cost of living isn't a core subject - but it's one that students should master, says Helen Monks

Heading to university is not just a huge emotional upheaval, with young people often leaving the nest for the first time, it is increasingly proving a major financial wrench, too. While students will have passed their exams to secure their place at university, their qualifications are unlikely to include much in the way of financial education. This means hundreds of thousands of young adults are unleashed each year into the sometimes confusing world of private landlords, banks and credit-card companies, often with little relevant knowledge or realistic understanding of the cost of living.

Heading to university is not just a huge emotional upheaval, with young people often leaving the nest for the first time, it is increasingly proving a major financial wrench, too. While students will have passed their exams to secure their place at university, their qualifications are unlikely to include much in the way of financial education. This means hundreds of thousands of young adults are unleashed each year into the sometimes confusing world of private landlords, banks and credit-card companies, often with little relevant knowledge or realistic understanding of the cost of living.

Gemma Tumelty of the National Union of Students says: "Students do not always realise how much debt they are likely to get into and how much their student loan will stretch to. When student loans do run out, they turn to commercial credit such as loans and credit cards, but often without having researched the best interest rates on offer."

In the worst cases those who fail to budget sensibly and avoid high-interest credit will set themselves up for years of financial stress; and evidence suggests the numbers of these individuals are rising. According to the Student Loans Company, 899 students filed for bankruptcy last year, compared with 276 in 2002.

Cases of those struggling to keep on top of their debts are hardly surprising when you consider the NUS estimates the average course costs for the 39-week academic year 2004/5 are £2,100 for students in London and £1,734 for those living elsewhere (this includes tuition fees at £1,150 and money for books, equipment and travel).

The NUS says students ought to budget for living costs at £8,086 in the capital and £6,850 for the rest of the country. When student loans (up to a maximum of £4,930 this year) credit cards, overdrafts and other borrowings are taken into consideration, the NUS reckons those starting their studies this autumn will graduate with debts averaging £16,294. While the cash outlook might look daunting, there are a number of straightforward measures to help stay on top of your finances as a student.

Mark Howard, managing director of the independent financial adviser M2 Financial, says: "Sometimes it is only when we leave home we realise how naive we are about money matters, but with a few careful, simple measures, you can keep one step ahead."

BUDGETING

When faced with the social whirl and mountains of books, students are perhaps unlikely to find the time or inclination to be overly parsimonious.

But there are realistic ways to get a grasp on what money is coming in and what you are spending it on without complicated budgeting plans.

Mr Howard says: "It would be great to think most students would be willing to write down everything they spend, but this just won't happen."

Instead, he suggests keeping on top of income and expenditure by running two bank accounts.

"At the start of each month take out whatever you need to cover your most important costs such as rent, bills and books and put it in an account where all your direct debits will be deducted from.

Whatever is left is yours to play with or to use to start building up an emergency cash fund."

If your spending is running away from you, stash one night's receipts for a reality check.

"Cooking with friends at home twice a week instead of going out could mean the difference between a debt mountain and being able to start your working life without thousands of pounds worth of extra borrowing hanging over your head when you graduate," he says.

BANKING

The bank a student picks is likely to persist into their working life, so it is vital to make the right choice. Banks use cynical marketing tools and freebies to lure the relatively innocent into their grasps, but do not be blinded. Stuart Glendinning, a director of moneysupermarket.com, the price comparison website, says: "Many of the high street banks use free gifts to attract students, such as music vouchers and free travel.

The first priority for every student should be to find an account that offers an interest- free overdraft and and that charges no fees. After this, consider how much access to money there is from local branches and cash machines. Freebies should be your last consideration."

There are six tests students ought to apply to any bank before signing their financial life away.

These are: How much will my free overdraft be? How much will my free overdraft be when I graduate and how long is this arrangement for? How much is overdraft interest now and how much when I graduate? What is the unauthorised borrowing fee and what other charges might I expect to pay? What interest will I receive in credit? Does the bank have a dedicated student adviser to deal with if necessary?

So ignore the free toaster or lightweight travel insurance deals and concentrate on the hard facts of what banks are prepared to do to make your life easier. To compare deals, check out www.moneysupermarket.com or www.moneyfacts.co.uk.

CREDIT CARDS

As young borrowers with little track record, students are denied access to many of the credit card deals advertised on the market, but they will find many of the big banks offering student accounts might offer them a credit card.

Credit limits will be lower than regular cards, for example the student Barclaycard limit stands at £600.

Students ought to avoid using credit cards at all costs, or at least try and pay off what they owe within the interest-free period each month.

The interest charged on credit cards is high. Barclaycard charges a not inconsiderable 17.9 per cent APR, so how much you owe will be bumped up by interest relatively quickly if you do not pay off the balance regularly. One form of credit students are strongly recommended to avoid is store cards provided by high street retailers. While it will be tempting, they ought to avoid any efforts to get them to sign up for these as interest can be a shocking 30 per cent APR, so amounts borrowed on these can rapidly spiral out of control if the debt is not settled every month.

Free advice is available at the Consumer Credit Counselling Service and National Debtline.

RENTING

Rent is likely to be the largest expense while at university.

Staying in halls of residence provided by your university is likely to be cheaper than renting privately, but if you have to go to a private landlord it is important to know your rights to avoid being ripped off.

The Office of Fair Trading recently issued guidance to help tenants stay one step ahead of unscrupulous landlords, including highlighting some of the traps in tenancy agreements and unfair terms.

Christine Wade, the OFT's director of consumer regulation enforcement, says: "Your tenancy agreement should be written in clear language, which you can understand and should not use legal jargon."

Look out for any one-sided term that gives the landlord too much advantage over you, for example, if it makes you pay for repairs that are the landlord's responsibility.

Terms can also be unfair if they allow the landlord freedom to decide how much of the deposit they keep at the end of the tenancy.

Landlords can deduct their reasonable costs from the security deposit if tenants fail to take reasonable care of the property. However, they should not be able to profit from the terms of the lease.

If damage is minor and easily rectified, the landlord should not be able to withhold the entire amount of the security deposit. Equally, the deposit cannot be withheld for normal wear and tear.

If problems or disputes do arise, your college accommodation office or Students' Union may be able to help, as might your local housing advice centre. Your local Citizens Advice Bureau, or the trading standards service provided by your local government authority may also be able to provide you with advice.

You can also talk to Shelterline, which can be contact on 0808 800 4444.

The Office of Fair Trading's leaflet highlights some of the pitfalls tenants may come across when entering into a rental agreements. You can obtain their literature on the subject by telephoning 0870 606 0321.

MORTGAGES

Increasingly, parents seem to be willing to help their children to buy property in university towns.

The route commonly used is where a parent acts as a guarantor on their child's mortgage - either for the whole loan or for the shortfall of the debt that the student's income will not cover.

For example, if the mortgage lender has worked out that the student can afford a mortgage of £120,000, but the property costs £200,000, then the parents can act as guarantor on the extra £80,000).

There are some newer mortgage products that allow for parents' income to be used when working out how much can be borrowed.

Rob Clifford, the managing director of the mortgage adviser Mortgageforce, says: "The Bank of Ireland runs a product called FirstStart, which allows for parents' income to be taken into consideration when working out the maximum the lender is prepared to offer and largely disregards the parents' existing mortgage commitments, which allows for more flexible calculations."

Mr Clifford says families ought to be aware of income tax-payable on rental income when rooms in any student property are rented out.

Another consideration must be the capital gains tax liability when the property is sold if it cannot be demonstrated that it is one of the family's main residences.

For these reasons, it can be a good idea to seek some tax planning guidance before looking into buying a property with or on behalf of a relative.

INSURANCE

Students are leaving home with possessions that have an estimated worth of between £3,315 and £6,370. But more than half of them do not have any insurance which would replace their laptops, stereos and games consoles if they were burgled, according to a study by Marks & Spencer Money.

There is about a one-in-four chance that you will be the victim of a burglary while you are at university, so it pays to think ahead. Students have two options when it comes to insuring their goods. They can ask their parents to cover their possessions as part of their own home-and-contents policy. Alternatively, they can get their own cover, perhaps from a student insurance specialist such as Endsleigh. As with all financial products, it will pay to shop around to find the most competitive premiums.

TAX

Students who work part-time do not need be caught out by paying taxes unnecessarily.

Chas Roy-Chowdbury, the head of taxation at the Association of Chartered Certified Accountants, says: "Like every other employee, students will only be subject to tax if they earn more than their personal allowance of £4,745 in this tax year (6 April 2004 to 5 April 2005), which is very unlikely if the job is only for a couple of months.

"Similarly, national insurance contributions only need to be made if more than £91 per week is earned. Any income above this and they will be liable to pay 11 per cent of it to the Treasury."

The ACCA warns that unless students inform the Inland Revenue that they are a student they will be taxed at an emergency rate of 22 per cent until the Revenue receives notification to the contrary. "Students should make sure that their employer submits a completed P38(S) tax form," Mr Roy-Chowdbury says.

"To claim back any over-paid tax, we advise them to complete a P46 form as soon as possible and, assuming that they have no other form of income, the taxman will then make the necessary adjustments and hopefully include a refund in their next payslip," he adds.

'I regret nothing. Four years of fun was a bargain'

Manchester is an exciting place to go to university: great nightlife, lots of live music and a massive student population. And it's pretty good academically, too. These were all reasons to go to Manchester and leave my home town of Chichester, West Sussex.

But perhaps the most important reason for heading north for my studies was financial; Manchester was cheap four years ago and this seems to be an ever-increasing consideration for students. I could have lived at home and studied at a local university, but where's the fun in that?

I spent my first year living in a hall of residence. Ronson Hall was in the city centre and five minutes' walk from the main university building, but was still astonishingly cheap at about £40 a week, including bills.

My first semester was spent in reckless abandonment, as I frittered my way through my first instalment of student loan (about £900) and interest-free overdraft from HSBC (another £750).

My obliging parents also helped out by paying my rent, but by Christmas I was broke and forced to work in a clothing shop, just to get by. I resolved to be more careful with money next semester. I and a group of friends decided to rent a house for the next two years, living south of the centre, in Fallowfield. Rent was about £55 a week for a small terraced house with a damp problem. We all found it harder going during the second and third year, as Manchester became increasingly expensive.

For my final year I decided to move back into halls. The cost of halls had shot up and I found myself shelling out almost £80 a week, not including bills. I spent less on going out, but my rent more than made up for that and I had to get a hardship loan from the university to bail me out. At the end of four years I owe the student loans company just under £11,000 and the bank £1,500.

I managed to avoid using credit cards at uni, so I'm not burdened with crippling interest rates. I don't suppose I'll be able to move into my own place for a while (I moved back home after graduation), but I don't regret my choices - four years of fun was worth the bargain price of £12,000, even if it hasn't yet helped me get a job.
Jamie Darlow

Where to seek financial advice

The National Union of Students www.nus.org.uk

M2 Financial www.m2financial.co.uk on 08701 432 100

Barclaycard www.barclaycard.co.uk

The Consumer Credit Counselling Service www.cccs.co.uk on 0800 138 1111

National Debtline www.nationaldebtline.co.uk on 0808 808 4000

Office of Fair Trading www.oft.gov.uk

Mortgageforce www.mortgageforce.co.uk on 01332 258 666

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