Those heading off to university this autumn are no doubt looking forward to lots of exciting experiences – but most will also have money on their mind.
The average maintenance loan in England now falls short of average living costs by £504 per month, according to the website Save the Student.
Rises in the cost of food and bills in recent years have made it even harder to budget effectively, especially for those who don’t have support from their parents, or are on a course which doesn’t leave much time for part-time work.
As a result, many might find themselves dipping into their overdraft, taking out a credit card or even looking for a loan.
Student budget: Data shows the average maintenance loans falls short of living costs by £504
Alex Gallagher, chief strategy officer at the student deals website Unidays, says: ‘Anxiety about finances and the affordability of the university experience remain a huge concern for the student community.
‘Earlier this year, data from Unidays members revealed that 47 per cent of students were more worried about the cost of living than their academic studies, and even their personal health and wellbeing.’
We explain what students need to know about overdrafts, cards and loans, as well as the risks to watch out for.
> Best student bank accounts 2024: Read our guide
How does an overdraft work?
Before taking on debt, students should explore other options such as grants and bursaries from their university.
Borrowing money from parents and paying them back without interest is also a less risky option, if that is possible.
But for many, it is not – and according to Save the Student, some 37 per cent of students said they use their overdraft.
Overdrafts allow you to withdraw money beyond what you have in your account.
Unlike other bank accounts, student accounts generally come with an agreed 0 per cent overdraft as standard, essentially allowing you to borrow money without paying interest on the borrowings.
It’s vital to keep an eye on how much of your overdraft limit is left, as going over the ‘arranged’ amount can result in hefty daily fines.
It’s better to have an overdraft and not need it, than to need it and not have it
Tom Allingham, Save the Student
But within that, it can be a useful way of making up for a shortfall or helping you pay for something in an emergency.
Nationwide’s FlexStudent account, for example, offers a 0 per cent overdraft of £1,000 in a student’s first year, £2,000 in their second and £3,000 in their third and later years.
If you don’t have a student account, or a regular current account with an arranged overdraft, there will probably be a charge for every day you are in the red.
Tom Allingham, student money expert at Save the Student, says: ‘The interest-free overdraft on a student bank account is probably the safest, most easily accessible and all-round best source of extra cash at university – especially in an emergency.
‘Given our recent finding that the average maintenance loan in England falls short of living costs by £504 per month, we’d encourage students to focus on the overdraft when picking a student bank account. It’s better to have it and not need it, than need it and not have it.’
However, just because accounts offer an overdraft doesn’t mean that you should intend to use it, as there are risks if you borrow too much or fail to repay. It is important to remember that your overdraft isn’t ‘free’ money.
If you do borrow more than the agreed limit, known as your arranged overdraft, you will enter an unarranged overdraft in which you will likely face daily charges until you repay enough to go back below the limit.
Once you graduate, your bank will usually give you two to three years to pay off your overdraft interest-free, gradually reducing the amount that you are allowed to borrow, to ensure that you are paying the money back.
The key is to avoid borrowing too much in the first place, and only dip into your overdraft if you really need to.
Louise Hill, chief executive and co-founder of GoHenry, tells This is Money: ‘While it gives students a bit of extra wiggle room with their spending, this shouldn’t be viewed as an unlimited source of money that can be dipped into without any consequences.
‘Setting a realistic monthly budget before university will help students establish their needs vs wants, so they can approach their spending and overdraft responsibly.’
Should students get a credit card?
Plastic: As many as 15% of students now use credit cards, according to Save the Student
Like overdrafts, credit cards can be a useful tool when properly managed. The problem arises when many, drawn in by fresher’s week offers and the prospect of easy money, take out these products without knowing how they work.
Hill said: ‘Credit cards can be a good way for young people to learn about budgeting, planning ahead and understanding the value of a good credit rating.
‘It’s important that students take the time to understand what they’re getting into – in particular the interest they’ll need to pay back, and don’t rely on them as a “quick fix” to see them through to their next maintenance loan instalment or to impulse-buy the latest must-haves.’
Most students have little credit history and a small income, so they are only likely to qualify for credit cards specifically marketed at students.
We’d strongly urge students not to use a credit card unless they’re sure they can make the monthly repayments in full and on time
Tom Allingham, Save the Student
Generally, these have low spending limits, but also come with high interest if you don’t clear it each month.
Knowing how to use a credit card can help you to build a credit score, which can be beneficial further down the line, but it is important to follow certain rules.
For example, it is essential to pay off your credit card each month in order to avoid paying interest on your borrowing. If you can’t, then you must pay the minimum payment in order to avoid a late fee and damage to your credit file.
Best practice is to only use up to 30 per cent of your limit, as this will prove that you aren’t reliant on credit.
Like overdrafts, credit cards can be useful to help tide you over when waiting for a student loan payment, or in emergencies, with some 15 per cent of students now using credit cards, according to Save the Student.
Allingham told This is Money: ‘I’d imagine a significant chunk of that 15 per cent will be getting charged interest and not making the monthly repayments in full.
‘We’d strongly urge students not to use a credit card unless they’re sure they can make the monthly repayments in full and on time. If you can, then great – they’re a good way to build your credit score and offer extra protection on larger purchases.’
The risks of loans
Students do have the option of taking out a loan, which could be a personal loan or a ‘private student loan’ – one that is offered by a bank and not the Government.
However, these are far more risky than credit cards and overdrafts, and should not be used if there is any way to avoid it.
Allingham said: ‘Unlike credit cards, which can be a smart option for a small number of students, we’d argue that private student loans should never be treated as anything other than a last resort.
‘Providers will expect you to make repayments when you graduate, regardless of what you’re earning. In some cases, repayments may even start while you’re still studying.
That’s in stark contrast to Government-issued student loans, where the repayments don’t kick in until the April after you graduate, and when you earn over a threshold.’
Unfortunately for students, who generally lack good credit scores, lenders will be loath to allow them to borrow money without attaching high interest rates, in order to account for the risk that they won’t pay it back.
This also means that the danger of being unable to pay back your loan is even higher and could see students fall into considerable debt.
Ultimately, not paying back a loan can lead to having debt collectors turn up at your home to seize possessions, and possibly in you being taken to court by the lender.
Before even considering one of these loans as an option, there are many other ways that students could supplement their income – not least overdrafts and credit cards.
Allingham said: ‘Ask your bank to extend your interest-free overdraft, apply for some bursaries or grants, speak to your university’s money advice team about extra funding – do all of this and more before signing up for one of these loans.’
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