Student finance: Cut to the chase: Get value from your overdraft

Find real value in your overdraft, says Amy McLellan
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The Independent Online

Before the credit crunch, some high street banks, hungry for new customers, went out of their way to woo students – the high earners of the future – with offers of free iPods and laptops. Now, our chastened banking sector is trying to behave with a little more restraint, so this year's fresher cohort faces a rather more subdued selection of enticements, from music downloads to USB memory sticks.

But there's more to selecting a student bank account than sifting through the freebies. The right account can save a significant amount of stress when money runs tight towards the end of term. Given that student loans and bursaries will only stretch so far, the best thing to look for is an interest-free overdraft large enough to give you the financial headroom to make it through the year. Current offers for student overdrafts vary widely, from those that actually charge interest, to a Halifax deal that allows up to £3,000 interest free from the first year.

Michelle Slade, of the www.moneyfacts.co.uk comparison website, says the right choice now can pay dividends further down the line. "A Clydesdale Bank student account doesn't come with an interest-free overdraft, so a £2,000 overdraft would cost you £155 a year in interest, which is a lot of money to a student," says Slade. "If you used an interest-free facility instead, then over the course of a three or four year programme the savings would mount up."

Don't just look at the headline numbers, however. "Read the small print," cautions Meg Vickers in the student union advice centre at Manchester Metropolitan University. "The interest-free overdraft is often staggered over the course, so you won't get the maximum limit straight away in your first year. And the amount of overdraft you get depends on your personal circumstances, so it can vary from person to person. The bank will probably do a credit check first, so if you've had debts in the past this may affect you."

It's also important to check how much you will be charged if you go outside your interest free zone. The rates on authorised overdrafts tend to be competitive – from as low as 7.2 per cent compared to around 20 per cent on standard bank accounts – but the rates and charges on unauthorised overdrafts can be swinging. Technology can help you stay on top of your finances: some banks will send text alerts to warn when you're nearing your overdraft limit and most now offer free online banking.

Consider opening two accounts, one student cash account and one high interest easy access savings account – Birmingham Midshires offers 3.15 per cent on its Telephone Extra account – to help manage your finances. "Pay your loan into a savings account and then set up a standing order to pay your weekly budget into a current account and use that one to pay for your everyday expenses," suggest Claire Evenden, senior finance adviser at Greenwich University.

Psychology student Charlene Thomson, 26, used this technique during her first year at MMU. "I pay my rent and then put what's left of my loan into a high interest savings account," says Thomson, who also puts her wages from her part-time job into her savings. "I then try to use my overdraft for all my everyday expenses."

She admits to being financially disciplined, even running a spreadsheet to help with budgeting. "I went away to university before but I got into financial trouble, so I've learned some hard lessons," says Thomson. "When you go away for the first time, it's a lot of money to be thrown at you and along with the stress of moving house it's so easy to lose track of a few direct debits. I'm being much more careful this time."

What the banks are offering

HSBC

Interest-free overdraft of £1,000 in the first year, rising to a maximum of £2,000 in the fourth year.

Best freebie: free worldwide travel insurance for two years.

LLOYDS TSB

Tiered interest-free overdraft of up to £1,500 in the first year.

Best freebie: one year's membership to the Youth Hostel Association and 35 music downloads.

RBS

Interest-free overdraft of £2,750.

Best freebie: up to £100 off selected laptops; a discount card; and a free 4GB USB stick.

NATWEST

Interest-free overdraft £1,250, rising to £1,800 in fourth year.

Best freebie: five-year 16-25 Railcard worth £130.

HALIFAX

Interest free overdraft £3,000

Best freebie: commission-free currency and traveller's cheques.

BARCLAYS

Interest free overdraft £2,000.

Best freebie: overdraft extension up to £3,000 on request.

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