Many young people heading for university or college this month are about to experience the concept of real debt for the first time. Fees of up to £9,000 a year mean student loans, and while these are repaid over a long time once an income threshold is passed, they are nonetheless a debt that will be taken into account by future lenders, not least when seeking a mortgage. Beyond that there are living costs to be met, and despite the generosity of the Bank of Mum and Dad – or even grandparents according to recent surveys – overdrafts are a fact of life for most students. It’s hard to dispense advice to 18-year-olds leaving home, but some financial facts of student life are worth knowing.
They will be showered in freshers week, or before, with offers to open bank accounts. The best approach is not to be lured by freebies – although a rail card can be useful. The real target is the maximum free overdraft possible. These vary, from Halifax and HSBC at the top end of £3,000 for the first year, while others are in the £1,500 to £2,000 range. Santander offers 3% interest on balances over £300, but then credit balances are rare for most students.
The important message, though, is not about the amount of overdraft available, but the penalties for exceeding it. Halifax, for example, charges 24% interest plus a monthly £28 penalty. The take-home message for student borrowers has to be that overdrafts are fixed and can’t be bent in any way.
As to the choice of bank, loyalty to a bank or building society where you may have had a savings account is irrelevant. Just go for the best deal – loyalty is simply something banks exploit. Equally you do not need a branch close to where you will be – a good online app or website is more important. Resist being drawn in by freebies, such as two-for-one cards for meals, unless they come with free and flexible overdraft arrangements.
Be even more cautious when credit cards are offered – and they will be – with pre-set credit limits. These look attractive, but are the road to 20% interest rates and £12 fees for missed payments. Take one, but keep it for emergencies and pay it off as soon as the bill arrives.
Banks like students because they want them to be customers for life. But remember that under new switching arrangements you can change banks easily if by the end of the year the good deals are with another bank.
In terms of parent advice, anyone with younger children would do well to invest a regular small amount that will deliver a nest egg at 18. Even at today’s low interest rates £50 a month invested for 18 years will deliver a £25,000 egg.
Encourage young people leaving home to remember they’ll need to manage their cash flow – and the early days away from home can be costly. A simple spreadsheet budget will give you and them confidence that they have a plan in place to manage that first month or so.
Laptops and mobile phones are now essential for students and while university halls offer some insurance cover these can be included on your household ‘all risks’ section – although with student insurance relatively cheap it may be better to pay this and protect your claims history. This is important for shared accommodation, as it may not be covered by a parent’s insurance.
Another bit of good advice is the importance of part-time and summer jobs. These provide income, but equally importantly they provide something to put on a CV for employers to show evidence of a commitment to hard work.and getting out too early.