Students: Start your financial planning now

It's more important than ever to choose the right account for university. Julian Knight reports

The wait is over for hundreds of thousands of sixth-form students.

They have their A-level results and their minds will be turning to university, particularly as next year brings a trebling of tuition fees. As a result anyone taking a gap year could find themselves having to pay thousands more in fees. But for those uni bound this year, one of the first decisions they will need to make is which bank to have their current account with.

"The choice can seem bewildering, with some offering freebies, others not, and with different interest rates on offer and overdraft limits," said Michelle Slade, current account expert at financial information service Moneyfacts.co.uk. "But considering how much debt students can expect to build up during their university days, by far the most important thing to look for is the overdraft arrangement. Many are interest free but not all; what authorised overdraft limits automatically come with the account?"

Most accounts offer a tiered structure to their current account overdraft with limits expanding over time to take account of the gradual mounting expense of being at university. Take RBS, for instance; in year one the interest-free overdraft automatically available starts at £1,000 but grows to £2,000 for those on a five-year course. Santander has an almost exact offering and, like RBS, authorised overdraft extensions are interest free too. HSBC starts students off with only £500 interest free; provided they can show they can handle their finances, this mushrooms to £3,000 by year two.

Halifax and Barclays take a different approach with interest-free overdrafts of £3,000 and £2,000 respectively from year one, but both charge – 7.2 per cent by Halifax and 8.9 per cent by Barclays – for authorised overdraft beyond the initial interest-free buffer. Others such as the Clydesdale and Yorkshire bank (part of the same group) don't offer interest-free overdrafts at all.

"For those who anticipate needing a large overdraft it may be worth considering HSBC and Halifax," said Kevin Mountford from Moneysupermarket. "For students who tend to stay in credit, most accounts pay just 0.1 per cent on credit balances, although HSBC and Santander offer 2 per cent on amounts up to £1,000 and £500 respectively."

But just because an overdraft is there doesn't mean that it should be used to the max because eventually there will be a reckoning. "Students should ensure they can realistically pay back any money they borrow from the bank," added Mr Mountford. "It's also worth nothing that 0 per cent deals on overdrafts tend to expire after graduation, so students need to plan how they are going to get themselves back into the black, or could risk facing additional interest payments."

For those students fortunate enough to have money in their account – say, from parents or part-time work – the interest paid by banks on credit balances are going to be important. Here, though, in general students get a rough deal. "The average gross interest rate on credit balances is 0.26 per cent for student accounts – with over half of the accounts currently available paying 0 per cent interest on a positive balance," said David Black, analyst at financial information firm Defaqto.

The highest paying accounts come from HSBC and Santander which pay 2 per cent in the first year in HSBC's case or 1 per cent in Santander's. However, at those sort of rates, students who go to university with money in the bank would be better served by placing it in an instant access cash individual savings account earning a higher rate of return and then transferring the money to their current accounts when needed.

In the spirit of these austere times, freebies are a little thin on the ground this year for students opening current accounts. NatWest no longer offers discount train travel – which was very popular – choosing instead to give money off laptops and access to an advice service. Elsewhere, HSBC, keying into students' wanderlust, offers discounts on Lonely Planet guidebooks and travel insurance. Mobile phone and laptop insurance – useful but dull – is on offer from Santander, while the Halifax offers discounted car breakdown cover and commission-free foreign currency. Perhaps the most generous is Lloyds which offers free youth hostel membership, discounts in shops, free music downloads and access to an advice service. The Co-operative and Clydesdale play Scrooge and offer nothing.

But with all freebies, useful or otherwise, the advice is not to get carried away and let them blind you to the account deal. "Many banks offer incentives to students to try to tempt them into choosing their account, but these should be a perk and not the reason for selecting the account. While discount offers and cinema tickets may have short-term appeal, you could end up paying for them twice over with a higher overdraft rate," Ms Slade said.

With this year's intake likely to end with a debt close to £50,000, it's no wonder that students are forgoing at least part of the full university experience to reduce the burden in future. "Parents feeling the pinch are keen for their children to live at home and to attend lower cost universities. For young people, living at home will be a constraint on enjoying some of the best years of their life but a way of reducing the financial burden," said Annabel Brodie-Smith, communications director of the Association of Investment Companies. She urges students to save now to help to ease the reliance on overdrafts.

But whatever approach is taken Mr Mountford says it's best for students to be considered about their account choice. "With tuition fees set to increase yet again by autumn 2012, there has never been a more crucial time for students to consider their finances. It's important to get the ball rolling before the excitement of freshers' week kicks in, so university life can be enjoyed to the full, without financial worries when it's too late," he said.

What else to consider

Insurance

Endsleigh estimates that the average student goes to university with £2,652 worth of possessions. Good contents insurance is essential but check that portable items and gadgets are covered.

Credit Cards

Many current accounts come with a credit card but the rates will be higher than is available on a student current account overdraft.

Renting

Protect yourself and your housemates by ensuring that your deposit is kept with an official tenancy deposit scheme.