STUDENT FINANCE: Banking on a lifetime's commitment

Nobody could begrudge students their freebies. But the free vouchers and cash come-ons from banks which were so significant in wooing first year freshers a few years ago are beginning to fade in importance.

Admittedly, each of the big four High Street banks is continuing to offer an initial cash primer when first-year students open accounts with them: pounds 20 in the case of Barclays and NatWest, pounds 30 from Midland and Lloyds. Lloyds also harks back to the old days, with an alternative offer of a free Young Person's Railcard and a pounds 20 record voucher.

But students need to look a little deeper these days to find out where the really valuable incentives from banks are to be found. A few pounds in the account unfortunately is quickly spent and first-years have a three- year financial roller-coaster ahead of them. Student life these days is likely to end not only with a degree but also with debt - an average of pounds 2,200, according to a recent survey by the Co-operative Bank.

So wise freshers will look ahead, to check just how sympathetically a future request for an overdraft will be considered. Banks have been steadily increasing their arrangements for interest-free overdrafts, and for the first time this year both Barclays and the Halifax have reached the pounds 1,000 mark - though in both cases, this free overdraft facility is likely to be available only later in a student's course.

Other banks are slightly more modest in their free overdraft arrangements: pounds 750 is on offer from the NatWest, and pounds 500 from the Co-op and Bank of Scotland, for example. The Midland and Lloyds both offer free overdrafts on a graduated basis: pounds 500 for year one, pounds 700 in the second year, with pounds 900 available for the third and subsequent years of study. "We have to strike the right balance. We don't want to encourage students to get into more debt than they can deal with," says Geoff Ellerton, general manager with the Midland.

Banks vary to the extent that they make students sweat before agreeing to these overdrafts. Most campus branches of banks have staff dedicated to student business who are aware of the financial pressures students are under. It is usually fairly easy for new students to ask around to find out from second and third-years which banks have the reputation for being sympathetic and understanding. Students who have opened accounts in their home town may find their branch slightly less geared up to their needs.

A good relationship with the bank is particularly important for students who find they have to negotiate additional overdrafts. Most of the major banks have special low overdraft rates for students, provided the overdraft is properly authorised. Both Barclays and Midland, for example, charge just 1 per cent above base rate, an effective annual rate of about 8 per cent. The Halifax goes even better, with interest charged at 6.2 per cent.

The real problems can start for students who run up unauthorised overdrafts, when interest rates and charges become altogether much more harsh. Only the Halifax is prepared to be generous here: it has an unauthorised overdraft rate of 11.2 per cent for students (though with a potential pounds 10 charge if the overdraft continues beyond a month).

In the end, many students may simply decide their banking arrangements on the basis of a conveniently sited branch and a familiar name. However, cash dispensers arrangements effectively mean that nobody should be very far from a source of ready money. The two main cash machine networks bring together, respectively, Barclays, Lloyds, the Bank of Scotland and Royal Bank of Scotland, and the Midland, NatWest and TSB. (The Midland and Royal Bank of Scotland also have bilateral links). Anyone choosing the Halifax, the Co-op or Girobank has access to the Link network. The Halifax waives for students and other young people its unpopular 60p fee for customers using non-Halifax machines.

The question which perhaps remains after all this is - why are banks working so hard to attract student customers? Students may find it hard to make their finances balance, but banks too are going heavily into the red when providing student banking services. There is, after all, little profit to be made in offering free banking and several hundred pounds of free overdraft facilities.

The answer is clearly that banks expect to be repaid indirectly when students are older. "Young adults are our customers of the future and NatWest is committed to providing a comprehensive long-term banking service," says Dave McLean, head of personal banking services for NatWest. "Students tend to go on to become higher earners. If we can help them when they are having a tough time at college, if we can build up a rapport with them, then hopefully they will stay with us later," added a Lloyds Bank spokesperson.

In other words banks continue to hope that, whatever students get up to in their personal lives, when it comes to the banking relationship they will be prepared to settle for life-long and faithful monogamy. The banks may be disappointed.