Show-down for the loan rangers

The annual race is on: banks have already started vying for the custom of new students, who might just be rich one day. Abigail Montrose looks at the range of carrots on offer

The banks have begun their annual recruitment drive for new student customers. While they may be a little costly at first, students are potential high-income earners who often prove to be a good long-term investment for their bank managers.

Offering a good deal now, usually secures the student's custom in the long run. According to a recent survey by Barclays Bank, 73 per cent of students say they will stay with their banks after they graduate - compared with only 47 per cent in 1993 who said they would remain loyal.

Barclays believes that the rise in students' loyalty to their banks is probably a consequence of the increasing levels of service that banks provide, such as student advisers and more generous access to free overdrafts. So what should students look at when choosing a bank account?

One of the major concerns for most students is how they are going to manage on the student grant. While grants can be topped up with money borrowed from the Student Loan Scheme, many students find that they need additional sources of borrowing, if only to get them through the last weeks of term until they get a holiday job. This is where an interest- free overdraft facility can be invaluable.

Interest-free overdrafts offered on students' bank accounts range from pounds 500 to pounds 1,500, depending on the bank and how far through the course the student is. Barclays offers a pounds 1,000 interest-free overdraft to students in their first year, rising to pounds 1,250 in the second year and pounds 1,500 in the third and subsequent years. Others are not so generous; for example, the Co-operative Bank offers only a pounds 500 interest-free overdraft and the Bank of Scotland only pounds 600 interest-free.

Most banks offer students a reduced rate of interest if they exceed their interest-free overdraft. TSB and the Halifax Building Society charge 6.2 per cent APR on authorised overdrafts, while Midland and Barclays charge 1 per cent above the base rate. But others, such as the Co-operative Bank, charge nearer their standard rate of interest.

NatWest offers a reduced authorised overdraft rate of 9.3 per cent. The bank admits that this is not as generous as the rate offered by some of its competitors, saying it does not want to encourage students to take on too much debt.

"We are trying to encourage prudent money management," says spokesman Mike Vertigans. "We realise students may need to go overdrawn, but it is best if they keep within our pounds 1,000 interest-free overdraft limit. After that they should speak to their branch student adviser."

Many banks have student advisers in their branches who will help students work out their budgets, and how to fund any shortfall between their grant and their outgoings. Many students save up some money before going to university to help them through the first year, but this has usually gone by the second year, and students can find themselves getting into worse debt as their course progresses.

All student bank accounts offer a cheque book, cheque card, cash machine card and debit card. Some banks offer credit cards; fee-free credit cards are available from Bank of Scotland, Barclays, Halifax, Lloyds, Midland, NatWest and TSB. Students can apply for a credit card, but they are not always guaranteed to be given one.

Around eight out of ten students aim to travel abroad while at university, according to a survey by Midland Bank. So Midland, along with all banks offering student accounts, apart from the Co-operative, offers commission- free travellers' cheques and foreign currency.

Convenience can play a large part when choosing a bank account. The banks advise students to open an account at a branch near their home, then, when they know which college they will be going to, to transfer their account to a branch near the college. But students could find that the bank they choose does not have a cashpoint machine or branch nearby. For example, Halifax Building Society is installing cash machines at institutions around the country, but the installations will not be completed for a while so some will be without a Halifax cash machine for some time to come.

Several of the banks still offer freebies to tempt students. This year's offerings include cash, record shop vouchers, compact discs, telephone cards and Railcards. While the free gifts may be tempting, they are unlikely to be the determining factor when choosing an account.