First lesson for students should be budgeting

Students celebrating gaining record A level results on Thursday now have some important decisions to make. Their initial aim may have been to secure their university place, but if they fail to sort out their finances before they head off to college, they could end up counting the cost for years.

While fees of up to £9,000 a year are their main financial problem, for the many who will be living on their own for their first time will have to face taking responsibility for their own financial affairs. Even if universities are forced to slash fees to fill places, as a report by the Higher Education Policy Institute warned this week, students still face a daunting financial experience. Here are the key things they must consider to ensure university life doesn't become a cash crisis.

"It is important for students to consider finances at the start of university," says David Black, banking analyst at Defaqto. "Although money management may be the last thing they want to consider, doing homework up front and getting the right account in place could pay significant dividends."

With the average student having to survive on an annual income of less than £6,000 a year, half of which is derived from student loans, that makes sound sense. With such limited funds, three out of five students struggle to make ends meet, according to research from Lloyds TSB.

That forces more than half to take on paid work during term time, but doing so can have a negative impact on studies, warns Jatin Patel of Lloyds TSB. "Paid work can be a huge benefit to students as it can give them valuable experience; however, it should not be impacting on their studies. With finances tight, students need to ensure they use discounts and money management tools to help them manage their finances."

There are also tax implications to consider. Students aren't exempt from income tax demands. However, you'll only have to pay if you earn more than £7,475 in the current 2011-12 tax year. You'll also have to pay National Insurance if you earn more than £139 a week. Both should automatically be deducted from your wages. If you only plan to work in the holidays your total income for the year may be below the tax threshold, so fill out form P38(S) - available from your employer - to avoid unnecessary deductions.

One way to cut costs is to remain at home. At present only around a quarter of students lives at the parental home when at university but that's set to rise to half as youngsters look to cut costs, according to insurer LV. However, doing so can make it harder for students to feel involved in university life. The key is to get the balance right between getting the most out of the college experience while not burdening yourself with too much debt.

As part of that students should avoid the temptation to get a credit card - it's a sure way to get into debt trouble which can quickly spiral out of control. Parents who want to help students should consider getting them a pre-paid card.

It'll give youngsters the convenience of paying by plastic without the temptation to get into trouble.

Then, when kids need emergency cash, parents can simply add it to the pre-pay card by phone or online.

Cash points: Ignore the freebies

Students should focus on overdrafts – not freebies – when comparing bank accounts, advises David Black of analysts Defaqto. "Student accounts typically offer a number of incentives and, although useful, it is essential that students look beyond these and focus on what would happen if they were to become overdrawn," Black says.

Overdraft offers

HSBC and Halifax offer interest-free overdrafts of up to £3,000, at rival banks it's £2,000. If you stray further into the red charges will bite although they vary widely. For example, Lloyds TSB has an 8.2 per cent charge while Halifax – also part of the Lloyds Banking Group – charges three times as much at 24.2 per cent. Other lenders charge daily. Santander, for instance, charges a one-off payment of £5 per day, capped at 10 days per month.

Interest on credit

For the very rare student who may be able to stay in credit during university, most accounts pay a practically worthless 0.1 per cent on balances. However particularly flush students can get interest of 2 per cent on amounts up to £1,000 at HSBC or £500 at Santander.