Student days are over, now for the pay-back

Once student days are gone, the hangover often remains - in the shape of thousands of pounds worth of accumulated debts. Of the 240,000 graduates who have just left higher education, only some will have landed themselves a career job. Many of the rest are working in low-paid jobs just to get by and to service their debts. The worst off are those unable to find work, whose income support cheque does not even stretch to limited interest repayments.

The average college-leaver has just graduated owing more than pounds 3,000. This breaks down into student loans, bank overdraft, credit cards, unpaid bills and sums borrowed from parents. Many are in worse trouble, owing pounds 6,000 or more.

A crumb of comfort came from Barclays Bank last week. In its annual survey of student debt, debts to banks had fallen to 18 per cent of the total. Student loans, with their generally more benign interest rates, have risen to 67 per cent.

Another positive sign is the effort banks are putting into smoothing graduates' transition into work. Most have special graduate accounts that extend students' interest-free overdrafts beyond the end of college. These accounts also offer reduced rates on overdrafts that exceed the interest- free level, additional cheap loans, interest on current accounts in credit and extras such as commission-free travellers' cheques and foreign currency.

In Barclays' survey, student loyalty to the bank they join has increased, partly explaining why banks are prepared to shoulder such huge subsidies. Banks see students and graduates as their most attractive customers for the long term.

However, graduates should still shop around for the best deal. And contrary to popular belief, providing the individual has not got into too many scrapes with the bank during student days, he or she should be free to transfer an overdraft without penalty.

Midlands, Lloyds and Halifax extend interest-free overdrafts for one year (see table), while Barclays and NatWest keep theirs only until 31 December. At pounds 1,250, Midland has the highest interest-free overdraft, but Lloyds offers a pounds 300 interest-free overdraft into the second year after graduation.

Authorised overdrafts above the interest-free level range between 6.2 per cent at Halifax and 14.5 per cent from Lloyds. Those wanting to borrow extra, for example to buy a car or pay for their summer break, should also note additional loan rates. These range from 8.2 per cent at NatWest to 14.5 per cent at Abbey National. By comparison, regular, non-graduate personal loan rates can go as high as 18.5 per cent. Most preferential graduate account terms last for one year, except for NatWest and Lloyds, which last for two.

Interest for those lucky enough to be in credit is nothing special, however - from 0.2 per cent at Midland to 3.1 per cent at Halifax.

All the low-interest loans in the world will not help the unemployed pay back what they owe, and people with jobs also face a tough time. The average graduate salary is pounds 12,248 - perhaps pounds 700 a month net. From that, unless they live at home, they will have to pay bills, transport and rent, buy new clothes and pay back loans.

The next blow is when the graduate's wage reaches pounds 15,000, which is 85 per cent of the national wage. At this point he or she will start having to repay any student loans. Repayment should last no more than five years, so a loan of pounds 3,000 would require monthly payments of pounds 50 to pounds 60 (interest is charged at the rate of inflation).

If you do get into trouble with any of your creditors, most student unions have student money advisers. Banks also have advisers - Barclays has 70 dedicated to graduates. Jan Smith, spokeswoman at the Consumer Credit Counselling Service, says you need to sit down and calculate your income and your liabilities. You should prioritise housing, utility bills and community charge, and then calculate if you can afford to pay any other creditors. Then contact these creditors to tell them of your situation.

Do not be pushed into abandoning your payment priorities by aggressive banks or letters threatening court action. Let creditors know you will be in contact very soon, and seek advice.

Student money advisers or Citizens Advice Bureaux can help you negotiate with your bank, which might try to persuade you to repay more than you can manage and then take court action if you fail to stick to any agreement. Advisers say people experiencing difficulties may be able to negotiate an extension on the interest-free overdraft period, or make minimal repayments of pounds 5 to pounds 10 a month.

Graduates should think before accepting the bank's offer to convert their overdraft into a low-cost loan. This may save on interest charges in the short term, but you may end up paying more as you will be tied in to making interest repayments for the life of the loan, not just for the period in overdraft.

Further, if you are not working, it will do you no good to convert your overdraft in this way, as loan repayments will be deducted automatically from your current account and probably drive you back into the red.

Another tip is to make sure you inform the Student Loan Company (SLC) of any change of address. The January after you graduate, the SLC will send you a deferral form, which you should use to put off repayment if you do not yet earn 85 per cent of national earnings. If you fail to send in this form, the SLC will activate the direct debit you have signed and start deducting repayments from your account.

Graduate bank accounts

Interest-free Additional overdraft Preferential

overdraft interest rate loans

Barclays pounds 1,000 until Authorised 6.7% Up to pounds 5,000 for

31 Dec Unauthorised 17.75% 5 years at 11.3%

NatWest pounds 1,000 until 9.3% 8.2%

31 Dec

Midland pounds 1,250 for 16% Up to pounds 10,000 for

1 year 5 years at 9%

Lloyds pounds 700 - 1 year 14.5% Up to pounds 5,000 for

pounds 300 - 2nd year 5 years at 8.9%

Bank of pounds 600 Authorised 6.2% -

Scotland Unauthorised 28.25%

Halifax pounds 1,000 for Authorised 6.2% -

1 year Unauthorised 11.2%