How to be a student survivor

Continuing our series on investing for children, Sam Dunn studies undergraduate finances

Fancy a free toaster, a flight to Paris or a £1,500 interest-free overdraft? Faced with freebies from banks eager for their business, undergraduates choosing a student account can be distracted from what's really important.

For many 18-year-olds, university will be the first time they have to do their own budgeting, involving an unwieldy mix of student loans, part-time earnings, credit card spending and overdrafts as they try to cope with rising living costs and tuition fees.

Although the Government sees university as investment for your future earning power, the returns can seem very distant when you start out.

The National Union of Students (NUS) estimates that the average student leaves college at least £12,000 in debt. In a 2002 survey, Barclays found 31 per cent of students owed money on a credit card, while more than half had an overdraft. And some 60 per cent of students have to work to meet basic living costs, according to a TUC survey.

Unless you have the backing of wealthy parents or benefactors, you will need to open a student bank account to access your loan and get an overdraft. Every May, high-street banks issue new offers designed to attract the next crop of undergraduates. Chris Weavers, NUS vice-president, advises students to weigh up the different packages. "It's so important to look at the long term rather than at freebies. There's no point opening an account and getting £30 if you're going to be charged that for letters sent to you," he says. "You should shop around because bank overdrafts and charges vary greatly."

All high-street banks offer internet and telephone banking to students, but often it's the incentives that grab the attention, such as holiday discounts with Halifax, free flights with Royal Bank of Scotland (RBS), or a toaster and kettle from NatWest.

But your overdraft facility is more important. Data provider Moneyfacts says most banks offer an interest-free overdraft of at least £1,000 in your first year, rising as your course progresses. For example, Abbey National's interest-free overdraft is £1,000 in the first year, £1,250 in the second, £1,500 in the third and £1,800 for a fourth year.

Crucially, you need to watch how much interest your bank charges if your balance spills over these levels. Most lenders let you negotiate an additional authorised overdraft, though Barclays and online bank Smile insist on limits of £3,000 and £2,000 respectively.

But interest paid on the extra overdraft varies hugely. Some lenders use the base rate, currently 3.75 per cent, as a benchmark: HSBC adds one percentage point on top, whereas Bank of Scotland adds five points. Other len- ders fix their own annual overdraft rates: Halifax char- ges 7.2 per cent, Barclays 8.9 per cent, the Co-op 9.79 per cent and Smile 9.9 per cent.

NatWest has the best deal of all the banks, with no interest on authorised overdrafts. Students can also negotiate the size of their overdraft.

But don't go overdrawn without notifying your bank or you'll be hit with fees and high equivalent annual interest rates. RBS charges 29.84 per cent for an unauthorised overdraft, plus £10 a month, while Lloyds TSB levies 29.8 per cent and £20 for each day it increases by £10 or more. This is capped at £80 a month.

Others are less punitive: HSBC charges 14.8 per cent with no extra fines, and NatWest 17.81 per cent.

Whichever bank you opt for, keep in regular touch. "If you are not used to handling money, we'll show you how to do so," says Mike Hodges, specialist manager for HSBC at Reading University. "We don't want to see students in the first week and then only at the end when they have huge amounts of debt."

If things become unbearable, you can apply for hardship funds or special grants, which are available at many universities. Mr Weavers at the NUS adds: "All universities have some kind of consulting service. If your finan- cial problems get really tough, you must seek advice."

One way to stop your debts rising too high is to avoid the credit cards on offer from most banks. These have the same interest rates available to regular customers, who are more able to clear their balances each month.

Some students opening a bank account may be tempted to opt for a smaller, regional network, particularly if that is what their parents use. But the high-street banks tend to be more useful: neither the Clydesdale nor Yorkshire bank offers interest-free overdrafts, for example, and both charge more than 31 per cent for unauthorised overdrafts.

When choosing a student account, it is also worth looking beyond your university years and seeing how the bank treats graduates. When you start working and paying back your debts, you'll need a good graduate loan or overdraft to make the process easier.

Next week: graduate accounts