Moneywise guide to student finances
With new students facing a total cost of £53,330 for university, according to the new Cost of University study from protection specialist LV=, chances of graduating in credit are increasingly unlikely.
But, while debt may be inevitable, helping your child swot up on student finances before term starts will save them paying dearly later.
One of the first things your child needs to think about is a student bank account. But, while all the banks will be out to win their business, Clare Francis, editor of comparison website moneysupermarket.com, recommends caution: "Don't be bamboozled by the freebies.
"Weigh up other factors such as the location. A bank on or near campus will better understand the needs of students than one in the centre of town."
Also compare overdraft facilities. At the time of writing, interest-free overdrafts of up to £3,000 are available, although these are subject to an individual's status rather than guaranteed.
While this is a useful feature, caution your child to be careful not to slip further into the red without speaking to their bank first. An unauthorised overdraft can be cripplingly expensive. For example, Halifax charges 24.2% and Santander £5 a day, capped at 10 days a month.
It's also important to check how long an interest-free overdraft lasts. Sylvia Waycot, editor of comparison site moneyfacts.co.uk, explains: "Your overdraft will stop being free at some point after graduation so check how long your bank gives you to clear it. It could be as long as a year but it's important to check as interest rates can be high."
As well as signing up for an account, it's likely the bank will also offer students a credit card. For example, NatWest has a card with a £500 credit limit and 56 days' interest-free credit. It also has an interest rate of 18.9% but, while this is a nasty sting, Francis says students shouldn't necessarily be put off credit cards.
"Credit cards can be practical, useful for shopping online and giving you protection on purchases over £100," she explains.
"If you can clear your card every month you won't pay a penny in interest and it will help you build up a good credit record for when you need to borrow more or take out a mortgage when you're older."
Grants & scholarships
It's also important that new students get to grips with what money they'll receive. First, they may be entitled to an annual maintenance grant if your income (if you're the parent) is below £42,601.
They can apply for this before they start college or during the academic year and the most they'll receive is £3,250 if your income is £25,000 or less in the previous tax year, with support falling to £523 at £40,000 and £50 at £42,600.
It's also worth looking around for bursaries and scholarships. According to scholarship-search.org.uk, there's almost £250 million of cash available, with tens of millions unclaimed each year. Funding can be for academic excellence, to help people from disadvantaged backgrounds or for students training for a particular career. More details can be found on the website.
Paul Clarke, web editor at Brightside Trust, a charity that provides e-mentoring and financial education to 14 to 25-year-olds, also recommends contacting the university your child will be attending: "There's a lot of discretionary funding available and this has been boosted by the National Scholarship Programme. If you haven't asked your university already, do it now.
While a scholarship is useful, for most students, a loan will be an inevitable part of university life. All students starting this year can take out a tuition fee loan of up to £9,000 a year, which is paid directly to their university.
On top of this, they can take out a maintenance loan to cover living expenses. The amount they can borrow is based on household income and tops up any grant. The maximum loan this year is £7,675 if they live away from home and study in London, or £5,500 if they're away from home and study outside London.
For this year's freshers, interest at RPI (retail prices index) plus 3% is charged from the day they take out the loan until the April after they leave college.
After that point, the interest rate charged will be dependent on income, starting at RPI for those earning less than £21,000 and rising to RPI plus 3% for earnings above £41,000. Repayments kick in when income exceeds £21,000. At this point they'll repay 9% of income above £21,000 and, if they haven't cleared it after 30 years, the debt is written off.
Laptops, smartphones and TVs are standard kit for students but these items make them a top target for criminals. Insuring these items can give them the peace of mind they'll be replaced if they are stolen or lost.
While it's possible to add a student to their parents' home insurance, moneysupermarket.com's Francis says this can be a false economy: "A claim could affect the parents' no claims bonus. This could push up their premium and make cover more costly." Taking out a student policy with a well-known student insurer such as Endsleigh may be a better option.
Once your child knows how much money they're going to have each term, it's time to set a budget. This will balance their income and expenditure and help prevent them running out of cash before term ends – and running back to you for more.
To help students plan and manage their money at university, Brightside Trust provides a student calculator. This can be found online at thebrightsidetrust.org.
Having a job to supplement their student loan can also help stretch their budget but it's important to balance working and studying. All sorts of job options are available for students but finding something that gives them more than some spending money could be a sensible strategy.
For instance, why not get a job somewhere you shop and take advantage of staff discounts? The Body Shop, Republic, New Look and Lush give staff a discount of 50%.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
No claims bonus
A discount on a car insurance premium as a reward for having not made a claim on the policy. The NCB is earned for every year of claim-free driving; a driver will earn another year’s NCB to a maximum of five years. The actual discount on the insurance premium will depend on the insurer. If you make a claim, your insurance company may reduce your discount by a number of years so you have to “earn” these over again or it may revoke the NCB entirely. Motorists can generally transfer their NCB across to another insurer and can pay an additional premium to protect it so should they have an accident, the NCB remains intact.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.