Banking by degrees

How times have changed. Barely 10 or 15 years ago, a student could virtually guarantee a hard time from the bank manager, particularly when it came to overdrafts. In fact, most students were never quite that bad. True some left college owing some money, but nothing compared to today. Surveys by Midland and Barclays banks show levels of final-year debt running at pounds 3,000 to pounds 4,000.

Now the banks' attitude to student debt is infinitely more understanding. Mostly, they positively fall over themselves to offer generous overdrafts, some running into four figures - that students can pay back at very competitive interest rates. Reasons aren't hard to find. First, student debt is, sadly, an "acceptable" and permanent feature of college life.

Abolition of student grants and the introduction of tuition fees have made students far more dependent on loans. Banks see themselves as part of the equation. Midland Bank's Degrees of Debt survey last year found more than half of sixth-formers' greatest concern is money, while 70 per cent expected to borrow in their student days: in fact 92 per cent will be in debt by year three.

Last month, a NatWest survey found nearly four out of 10 of this year's sixth formers had considered not going to university due to tuition fees - a rise of 21 per cent against a year ago. And figures from Ucas, the universities' central administration service, showed a fall in university applications for the second year in a row.

Yet banks know that, despite the sometimes massive overdrafts, students pay them off as soon as they start work. A sense of middle-class probity ensures they do, though it may cause hardship for a long time - up to five years, says Midland.

Finally, banks know that, if they catch their clients young and cosset them, eventually they will generate a healthy income stream for many decades. Student overdrafts are a necessary investment in the future - for both banks and their clients.

So what are banks prepared to offer their teenage customers? Each bank's package differs slightly, but most common is the free overdraft.

NatWest will offer an interest-free pounds 2,000 overdraft for five years, doing away with last year's tiered system, whereby the amount students were allowed to be overdrawn grew each year. But the bank insists this is not automatic. All limits are assessed on an individual basis and discussed between the student and an adviser.

The bank doesn't rest there. Those opening one of its student accounts before 30 November get a pounds 35 gift (plus pounds 15 more if the account is at one of the bank's "specialist" student branches) - or a Panasonic portable compact disc player.

Midland's package also involves a pre-agreed, interest-free overdraft of pounds 750 in year one, pounds 1,000 in year two, pounds 1,250 in the third year, rising to pounds 1,500 a year thereafter - plus a free, pounds 72 four-year Railcard or pounds 50 cash. Extra borrowing is 1 per cent over base rate, 5 per cent at present, while its fee-free credit card charges 11.9 per cent APR for the first six months - up to a pounds 500 spending limit.

Lloyds Bank's package is still being finalised. A spokeswoman says details will be announced early in August: there will be "some differences" to what's available now. At present, the bank offers a pre-agreed overdraft of pounds 750 in years one to three, which is potentially extendable to pounds 1,000. Thereafter, the limit is pounds 1,500, with a possible extension to pounds 2,000. All new account openers get pounds 35 in cash, plus a further pounds 5 if they were already customers.

Barclays Bank's interest-free overdraft limits are pounds 800, pounds 1,200, pounds 1,600, pounds 1,700, pounds 1,800 in years one, two, three, four and five. Extra interest on agreed loans is 1 per cent over the base rate. Barclays offers free 24-hour, year-round Internet banking. Its fee-free Barclaycard isn't such good value: 18.9 per cent, with a pounds 350 limit.

Some present or former building societies have also successfully attracted students. Halifax has offered them a pounds 1,000-a-year interest-free overdraft for up to six years (one year after graduation), plus agreed overdrafts of 7.9 per cent EAR (Equivalent Annual Rate). It also offers phone banking, commission-free travel money and a cashcard.

Royal Bank of Scotland offers overdrafts rising from pounds 1,000 in year one to pounds 2,000 by the end of the fifth year, with "lifestyle benefits", including 20 per cent discounts on books, CDs and videos, 25 per cent off concert tickets and 24 per cent off regional and national phone calls.

Bank of Scotland, the leading bank for students north of the border, offers less - pounds 800 in year one, rising to pounds 1,000 for final-years. But, where students genuinely need more money, "we will do our best to assist with preferential rates".