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The long-term view of borrowing

Financing your student career needn’t be scary. With so many tempting interest rates for students, it pays to shop around, says Amy McLellan

It’s a lucky student indeed who emerges from three years of higher education without some kind of debt to their name. But careful money moves at the start of your university career could lessen the burden when it comes to graduation.

The first step is to make sure you access all the funding you’re entitled to: this usually means a mixture of loans, grants, bursaries and, for the lucky ones, parental contributions. Of these, the largest element is likely to be the student loan, a low interest package available to all full-time undergraduates from the Student Loan Company ( www.slc.co.uk). Twenty five per cent of the loan is means-tested; the remaining 75 per cent is available to all eligible students regardless of household income.

The maximum loan rates vary depending on circumstances. For the 2008-9academic year, students living at home can borrow £3,580 (£3,235 in the final year of study), rising to £4,625 (£4,280) for students studying away from home and £6,475 (£5,895) for students studying in London.

You get this money by applying to your Local Education Authority (students from Scotland should apply to the Student Awards Agency for Scotland and those in Northern Ireland to their Education &Library Board). The SLC then pays the money into your bank account in three instalments at the start of each term.

A word of caution, however. “As a student you basically get three ‘pay days’ a year and that can make budgeting difficult,” says Tricia Joyce, from the student financial support office at Manchester Metropolitan University. “A large cheque comes into your account in September, and it looks like a lot of money. But remember: there’s no more coming until January.”

The student loan is a cheap way to borrow, as the interest is linked to inflation (4.8 per cent last year) rather than commercial rates. This means you repay, in real terms, the same amount as you initially borrowed. What’s more, you don’t have to pay back the loan until the April after you have completed your degree, and only then once you are earning over £15,000.

The repayments are collected directly from your salary at the rate of 9 per cent of any income over the £15,000 threshold. So, for example, if you are earning £18,000, your monthly income will be £1,500, of which £1,250 will be ignored, leaving £250 on which repayments will be due. Nine per cent of £250 equates to a loan repayment of £22 a month.

Because this is cheap credit it can be worth taking out an SLC loan even if you think you won’t need it (you can repay it early with no penalties). The money could help cover unexpected expenses and could even generate some interest as long as you put it to work.

“We would definitely recommend that a student pays their Student Loan into a savings account if they don’t need to use it all immediately,” says a spokeswoman for HSBC’s Youth Team. The high street bank offers an e-ISA with an interest rate of 6.25 per cent and instant access to the funds. Another option is to use the bank’s online bonus saver account, which pays 2.75 per cent interest for every month no withdrawals are made or 2.5 per cent when money is withdrawn.

Other banks also offer online saving accounts, which can be used to put money aside to help pay for phone bills, utilities or travel. Your choice of bank account can play a key role in how you manage your financial affairs over the next three or four years – and beyond. Banks are keen to sign up students, the potential high earners of the future, and offer a range of perks and discounts to win your business.

“Don’t be swayed by freebies and gimmicks,” says Claire Evenden, student finance adviser at Greenwich University. “Look at the size of the overdraft, the interest rates and also the charges – how much are they and when they are taken?”

It’s also important to take a longer-term look. Your bank may offer generous overdraft terms now but what happens when you graduate? Check how the bank will help you make the tricky transition from student to graduate: not all university leavers walk into highly paid jobs in the City and the sudden withdrawal of interest-free credit can be painful.

HBOS offers the largest interest free overdraft at £2,750, pays 2 per cent on balances kept in credit and extends the interest free offer for one-year post-graduation. The Barclays overdraft maxes at £2,000 and the bank offers up to £3,000 interest free on its Graduate Additions account.

Make sure you make your bank account work for you: use internet and telephone banking to have 24-hour access to your accounts and sign up for any free text alerts that can inform you when you’re nearing your overdraft limit.

A number of high street banks offer fee-free credit cards but most student finance advisers recommend steering clear unless you’re the sort of person who is highly disciplined about purchases and repayments: it’s very easy to run up thousands of pounds of debts.

Students seeking additional funds need to make sure they are claiming everything they are entitled to in the form of grants, scholarships and bursaries.

Talk to the university student support office, check out your eligibility for the “access to learning” fund and research additional pots of money on the web: the Educational Grants Advisory Service ( www.egas-online.org) is an easy way to find out which educational trusts and charities match your circumstances.