Banks chase the graduate pound

Exams are finishing, the parties will soon be over, here comes the hangover. The vast majority of students graduating this summer will leave university in the red, and typical debts will be around pounds 3,200 - pounds 200 more than last year.

Bank overdrafts now account for just 15 per cent of those debts. Student loans have risen to more than two-thirds of the total.

So when is it payback time? Not until you are earning 85 per cent of average national earnings, about pounds 15,900. When you are, the Student Loans Company will start debiting monthly repayments from your account in April, which, for a debt of say pounds 3,000, means pounds 52 a month over five years. If you won't be earning that much, do not forget to fill out the repayment deferral form, which will be sent to you in January.

In the meantime, the high- street banks offer special graduate accounts to cushion your descent into the outside world. Most graduates, with debts to service, will be concerned about the size of the interest-free overdraft and interest rates on additional debts. Graduates can opt for any deal regardless of who they banked with as a student.

Midland is offering the biggest interest-free overdraft, up to pounds 1,500 for a year, with lower limits for the next two years. In the second year after graduation the limit comes down to pounds 1,000, and in year three pounds 500. The Royal Bank of Scotland and the Halifax offer interest-free limits of pounds 1,000 for a year. NatWest and Barclays will give you only six months. You can only borrow pounds 700 interest-free from the TSB and Lloyds Bank, but at Lloyds you can keep a pounds 350 limit until two years after graduating.

Many debts will extend beyond these interest-free amounts and some graduates may look to borrow more short-term to tide themselves over. Here NatWest looks to have the best deal on full-blooded personal loans: up to pounds 10,000 at 8.2 per cent, repayable over seven years. Barclays and Midland charge 9.9 per cent for five-year loans on maximums of pounds 10,000 and pounds 5,000 respectively, but some banks (RBS, TSB and Halifax) have no special loan deals.

Midland's pounds 1,500 overdraft deal is an improvement on last year, but the bank is an exception as most have not improved their offers. Barclays has even cut its interest-free limit by pounds 500. However, all the signs are that you will not be treated too harshly if, once in a while, your account goes awry.

Louise Clarke of the National Union of Students says: "We're convinced that the banks usually treat graduates with fairness and flexibility. As long as you keep in fairly regular contact, you should be all right."

All the banks offer advice to those who get into serious difficulties. And student money advisers, who can be found at most student unions or Citizens' Advice Bureaux, will negotiate on your behalf if things get bad.

It may seem strange that the banks should be so generous to new graduates. They earn on average just pounds 12,700, and most still haven't started permanent full-time work six months after graduation. Many prefer to travel, or go into temporary work. Why treat these rather unprofitable customers so kindly?

The reason is simple: graduates are seen as a good long-term investment. They may not be worth much now, but in five years' time half will be in a position to get a mortgage. The banks know that once they have you on their books, there is a good chance you will stay.

q Conal Walsh has just graduated with nearly pounds 5,000 of debts. He is with Midland and probably won't switch.

CHASING THE GRADUATE POUND

Bank Interest-free overdraft Additional preferential rates Other highlights

Midland pounds 1,500 year 1, pounds 1,000 8.3% interest on additional authorised overdraft; Fee-free credit card

year 2, pounds 500 year 3 max pounds 10,000 loan at 9.9% for 5 years for 1 year

Barclays pounds 1,000 for 6 months, 7.2% interest on additional authorised overdraft; Free PC banking for pounds 100 for next 18 months max pounds 5,000 loan at 9.9% for 5 years 3 months

NatWest pounds 1,000 for 6 months Negotiable 9.0% interest on additional overdraft; Fee- free credit card for 2 years,

max pounds 10,000 loan at 8.2% for 7 years commission-free travellers' cheques and foreign currency

Lloyds pounds 700 year 1, pounds 350 year 2 14.5% interest on additional authorised overdraft; Fee-free credit cards

max pounds 5,000 loan at 8.2% for 5 years for 2 years

TSB pounds 700 for 1 year 6.2% additional overdraft Commission-free travellers' cheques and currency

Royal Bank pounds 1,000 for 1 year Negotiable 9.5% to 12.5% on additional overdraft Commission-free travellers'

of Scotland cheques and currency

Halifax pounds 1,000 for 1 year 6.2% additional overdraft Free contents insurance for 1 year, commission-free currency