Which student bank account?

Graduation can be a passport to higher earnings

With graduates predicted to leave university saddled with more than £30,000 of debt by 2010, it may come as a surprise that banks are still falling over themselves to attract student accounts.

But as a rule of thumb, graduates earn more than those who do not go to university.

The banks are betting that they will be able to recoup their money, plus interest, when the salary cheques start rolling in.

After all, despite a growing tendency for consumers to switch banks, it is still true that most stay with the same one for life.

"We believe they are a good investment as graduates on average earn 50% more than those that did not go to university," said Ian Villiers of NatWest.

"A little understanding and flexibility to meet their changing circumstances can pay dividends in the long term," he added.

Free gifts

Most banks use free gifts to tempt students into opening accounts.

NatWest is currently giving away 1,000 free flights, while HSBC gives students a five-year railcard which offers discounted train travel.

Focusing on the academic side of student life, Barclays gives new account holders a £20 book voucher and a 15% discount at Waterstones.

However, as far as financial experts are concerned, these gifts could prove a costly distraction.

"Unfortunately too many people see the word free and fail to consider whether the account will work for them," said Rebekah Kearey, director of independent financial advisers Roundhill Financial Management.

"Students need to ask themselves whether a book or CD voucher really worth paying extra on their borrowings," Ms Kearey added.

Charges

The rate of interest charged on student loans can vary spectacularly.

For example, students slipping into an unauthorised overdraft with HSBC will pay 14.8%, while RBS charges a more punitive 29.8%.

On the flip side, RBS student account holders who stay in credit receive a healthy 2.02% interest.

Most banks will let students have an authorised overdraft of between £1,000 and £1,250 in their first year, rising to £1,500 to £1,800 in the final year.

But once again, authorised overdraft charges vary enormously.

Barclays charges 8.9% for an authorised overdraft, compared with one percentage point above the Bank of England base rate (currently 3.5%) at HSBC, and a market-leading 0% at NatWest.

"You can not overestimate the impact of such charges, they can add to the overall debt burden on leaving university," said Ms Kearey.

"Students need to be forensic comparing all the charges before choosing the account."

Student bank accounts
Free overdraft	Bank of Scotland	Barclays	HSBC	Halifax	Lloyds/TSB	Natwest	RBS
Year 1	£1,250	£1,000	£1,000	£1,250	£1,000	£1,250	£1,250
Year 2	£1,400	£1,250	£1,400	£1,400	£1,250	£1,400	£1,400
Year 3	£1,600	£1,500	£1,600	£1,600	£1,500	£1,600	£1,600
Agreed overdraft	7.2%	8.9%	4.5%	7.2%	14.8%	0%	8.3%
Unauthorised overdraft	24.2%	27.5%	14.8%	24.2%	29.8%	17.8%	29.8%
Credit interest	2.53%	0.1%	0.1%	3.04%	0.1%	0.1%	2.02%