Big banks clamour for the student pound
By Simon Bain
AS a new generation of students prepares to head off to university this autumn, will the costs involved leave them regretting it? Across the UK, 37 per cent of under-35s who took a degree now say they regret doing so because of the debts they took on, and 49 per cent say they believe they could have reached the same point in their careers without it.
But in Scotland, according to the latest Aviva Family Finance survey, only seven per cent have regrets, although 46 per cent are not convinced they really needed the degree.
Almost one in five UK millennials who went to university are hoping their student debt will be wiped out completely in future.
Although students in Scotland get tuition fees paid, maintenance funding has shifted from grants to loans, with loan funding jumping from £175 million to £336m last year. The average new student is likely to graduate with £20,000 of debt, according to Audit Scotland.
But Tom Stevenson, investment director for Personal Investing at Fidelity International comments: “It’s likely that a significant proportion of students won’t repay their loan in full. If you think you may work in a lower-paid job, or will take time off to raise a family, it may be that you will never pay as much as the full upfront cost of your degree.”
Stevenson points out: “Student loans are different from other types of borrowing. Perhaps a more accurate way of thinking about this is as a ‘graduate tax’. Just as higher earners pay a higher rate of income tax, so too do graduates now.”
Graduates only begin paying their loan off when they start earning £21,000 per annum or more, at which point they pay interest and/or repay capital at nine per cent of their income above this threshold. But new loans are charged at retail price inflation plus three per cent, currently 4.6 per cent.
“For lower earners this means that the amount of interest they pay each year may not even match the amount by which the outstanding loan rolls up,” Stevenson says. “As a result, many people may never repay the full amount of the loan.”
Meanwhile, the annual banking beauty parade is under way, trying to entice students to become longterm customers – the big banks know only too well that 70 per cent of their customers are unlikely ever to switch their account once they’ve started.
Andrew Hagger, independent analyst at MoneyComms, says: “You are seen as the high earner of tomorrow so they’ll try to entice you with all sorts of goodies to sign up for their student bank account.
“However, for most students, being able to borrow as much as possible interest-free will prove to be the biggest financial benefit.”
Lloyds, Royal Bank of Scotland and Santander all offer a maximum of £2,000 interest-free overdraft whereas Barclays and HSBC are more generous, with a free limit of up to £3,000. But most banks start students off on £1,500 (the Co-operative is £1,400) and then not all at once. Bank of Scotland, which has a smart mobile-banking app, will move borrowers up from £1,500 to £2,000 after the third year.
Nationwide joined the party with its first-ever student account. It quotes an overdraft of up to £3,000 and exclusive access to a graduate account with a continuing free overdraft. Hagger says: “You are not guaranteed the interest-free maximum with any of the banks as you have to apply for the overdraft. However, it’s a sobering thought that the extra £1,000 interest-free from HSBC or Barclays would end up costing you £154 per year with Lloyds Bank – a difference of more than £460 during a three-year stint at university.”
Jody Baker, head of money at comparethemarket.com, adds: “Remember these have to be pre-agreed with the bank in order for them to be free, and there are bank charges if you exceed your agreed overdraft.”
It would cost students £5 a day up to £50 at Santander, and 1.82 per cent a month plus a £28 fee at Halifax.
The standout giveaway on the market is the free four-year 16-25 railcard from Santander – worth £90 – which could swing the deal for anyone with a distance to travel to university. RBS competes on transport too, with a four-year National Express coach card.
Rachel Springall at Moneyfacts says: “Another thing to bear in mind is the provider’s digital banking capability. Students don’t have to choose a bank that’s nearby or on campus because they won’t always offer the best choice for them.”
Whenever you are able to stay in the black, you really want your money to be working for you, especially with the current bombed-out interest rates. Santander’s 123 Student Account is offering three per cent on balances between £300 and £2,000.
However, you must ensure that you are able to credit the account with a minimum of £500 each month. Similarly, HSBC is offering two per cent on balances up to £1,000 in the first year of university, and TSB will pay five per cent on balances up to £500. Nationwide will offer one per cent on balances up to £1,000.