Graduating to bank accounts

Cash-strapped students face a vital choice on where to house their finances. Dido Sandler reports

FREE cash, railcards, discount vouchers, interest-free overdrafts of up to pounds 1,000, no-charge foreign currency and traveller's cheques, and credit cards without the fees. This financial wishlist is becoming a reality for hundreds of thousands of new students opening up bank accounts as they prepare for their first term in higher education.

Add these deals to the pounds 1,885 student grant (pounds 2,340 in London) and pounds 1,385 maximum student loan (London pounds 1,695), and freshers unaccustomed to having large lump sums at their disposal may be tempted to indulge in a spree.

Even so, the new computer and the stereo stack system will have to wait. With living expenses averaging pounds 4,665 for students in Manchester, and much more in London, an uncomfortable shortfall looms. Additional income from parents, or work - often during term-time - has become essential in order to survive. One in three students surveyed by the National Union of Students misses meals due to hardship. Up to one in twelve is said to drop out altogether because of financial problems.

Debt has become a fact of life for most students. Grants are being cut year on year, and replaced with student loans. The NUS calculates that in a couple of years many students will be leaving university with a staggering pounds 8,000 of loans and overdraft. pounds 2,200 is the current average.

The high street banks, as well as the Halifax Building Society, are falling over themselves to get students signed up. The marketing men have worked out that you are more likely to change your spouse than your bank account. So the stakes are high, and so are the incentives to join. "I didn't have a clue at the time. You'd just go to the nearest bank and pick up on the freebies,'' said one rueful second-year student.

However, student financial adviser Laura Lassman says students should look beyond the gimmicks. They can vastly improve the deals they get by shopping around. Here are a few tips:

q If by any chance you're hoping to stay in credit, consider accounts that pay better rates of interest on positive balancesBank of Scotland offers 4.75 per cent and Halifax 4.25 per cent. (If eligible, make sure you fill in form IR85, which exempts interest payments from tax.)

q But students are more likely to be in the red. For those who need to breach the interest-free overdraft limit, the Halifax, for example, provides cheap authorised loans at 6.2 per cent, or 11.2 per cent unauthorised.

q National Westminster maintains student terms on accounts only until the December after graduation. But the Co-operative Bank, TSB and Royal Bank of Scotland keep them going for a year.

q Perhaps the most important factor in choosing the right bank, is the bank's student business officer. The good officer should be understanding in day to day dealings, and give valuable advice.

Most student bank services offer commission-free foreign currency and traveller's cheque services, telephone banking, and free credit cards (only use these if you canpay up at the end of the month - interest rates are high). Most authorised overdrafts offer no-fee preferential rates.

Barclays reported a drop in lending to students last year, as the amount available from the Student Loan Company increased. This is the cheapest money available - apart from an interest-free overdraft. Loans are repayable only when students leave higher education, and earn 85 per cent of the average salary. Interest is at the level of inflation, calculated from when the loan is raised.

Canny students may wish to take out the maximum loan and put it in a high-interest account. This might earn up to 6 per cent interest. Interest on student loans is currently 3.5 per cent.

Similarly it may be worth using charge- and interest-free overdrafts offered by your bank and putting the money on deposit elsewhere. Beware breaching the free limit, though.

o Student Grants and Loans, a free guide published by the Department for Education, is available at colleges and LEAs. Student Loans Company: 0800 405010. Debt counselling from Credit Action on 0800 591084.

Student deals - what the banks are offering

Lender Incentive Interest-free o/d Authorised o/d Rate if in credit

Bank of Discount on pounds 500 5% ABR 4.75%

Scotland travel insurance

Barclays pounds 20 pounds 750-pounds 1,000 1% ABR 2.5%

Co-op Bank Ethical policy pounds 500 19.56% 0.25%

Halifax BS - pounds 1,000 6.2% 4.25%

Lloyds Bank pounds 30, pounds 20 vouchers pounds 500-pounds 900 7.9% ABR 1%

Midland pounds 30, pounds 15 on card pounds 500-pounds 900 8% 2.96%

Natwest pounds 20 pounds 750 9% 2%

Royal Bank Eurocheque pounds 500-pounds 750 3-6% ABR 3.5%

of Scotland card

TSB pounds 20 vouchers pounds 500-pounds 700 6.25% 3.5%

Source: Moneyfacts; ABR - above base rate