19 October 2020
Understanding your finances at university
The time has come to fly the nest and you’ve just moved into your new shared flat at university, or attended your first online lecture. Among all of the excitement, beginning university can be daunting.
For many people university is the first taste of freedom, and a chance to navigate the world (and your finances) without the help of your parents. While you may have lots on your mind, taking the time to understand your finances is extremely important, especially as there is so much about student finance and student overdrafts that is easily misunderstood.
This article will give you the lowdown on student overdrafts, and help you sail through university without racking up hefty charges.
What are student overdrafts?
Although many students are eligible for a maintenance loan to cover the cost of living while at University, for many students, this does not go far enough. Most UK students are eligible for the loan, but the amount they can receive depends on their household income and the area of the UK they live in.
Over half (55%) of students feel their maintenance loan falls short of what they need to get by, according to a 2020 survey from student money hub, Save The Student.
More than one third (38%) of students said they use their student overdraft as a source of income, according to the Save The Student survey. However, a separate study into overdraft users found that 68% of people surveyed didn’t know how much interest they are being charged on their overdraft.
Luckily, most student overdrafts are free, meaning you don’t pay any interest while you are still studying. However, it’s still very important to know what you are getting yourself into before spending on an arranged overdraft.
Firstly and most importantly, it’s crucial to remember that the money you are spending in your overdraft is not yours. It’s not free money, but a loan that you will eventually need to pay back.
The amount of money you can use on your arranged overdraft varies between different banks. Student overdrafts can be anything up to £3,000, but the amount you can borrow is often determined by your credit rating.
If you go over your arranged overdraft limit, you’ll find yourself in an unarranged or unplanned overdraft. Most banks will charge you for slipping into an unarranged overdraft, so it’s best to avoid this.
Before you sign up for a student overdraft, there are a few things to be aware of:
- Most banks can cancel your overdraft at any time. Although this is rare, make sure to read all emails and posts from your bank to avoid being met with a surprise.
- You will rack up charges if you go over your arranged overdraft. These are usually monthly fees, as well as daily fees for each day you are over your limit.
- Overdrafts can affect your credit rating. Your credit rating is important as it impacts everything money related, from your mobile phone contract, to buying a car or a house. If you frequently go over your arranged overdraft, this can have a negative effect on your credit rating.
Spending your money wisely
Maintenance loan payments come in three instalments throughout the year. You will receive your first payment when your term begins in September, the second after the Christmas break when term resumes, and the final payment in the springtime, ahead of the final term.
With a few months between each finance payout, it’s important to make sure your money lasts so you’re not completely dependent on dipping into your overdraft.
When family and friends tell you to budget your money, it may seem like a nag, but it will actually help you manage your money better so you have more money to spend on the things you want.
Splitting your student loan or wages into a monthly allowance will help you ensure you’re not spending it all in one go and leaving yourself nothing for the end of term. Budgeting a food allowance for each month will stop you starting the term on five Dominos pizzas a week and ending it with beans on toast and soup.
Once you’ve budgeted monthly costs for rent, bills, transport and food costs, you’re able to see how much you’ll have left each month for social activities, shopping and eating out. If you’ve got a busy month ahead with lots of birthdays and team socials, budgeting ahead means you can spend less on other luxury items to free up funds.
Paying back your loans and overdrafts
Unlike student loans and maintenance loans, overdrafts need to be paid back as soon as you finish university.
Student loans and maintenance loans will only be repaid once you earn above a certain threshold. So, if, for example, you finish university and move back home for a while to look for a job, you will not have to make repayments.
If you began uni after September 2012, the salary threshold above which you’ll have to repay your student loan is £511 a week or £2,214 a month in earnings before tax and other deductions. This works out at around £26,500 a year, but these change in April every year.
You can find detailed information about repaying your student loan, as well as postgraduate loans at the Gov.UK website.
Overdraft accounts, however, need to have money coming back in to minimise the balance as soon as you finish university.
The criteria for repaying your overdraft depends on the bank your account is with. Most banks give students between one to three years to pay off their overdraft. If you have not paid it off within this time, you will begin paying interest, or even find yourself being charged.
When you finish university, it’s best to set up a personal plan to pay off your overdraft in time. For example, if you have a £2,000 overdraft and two years to pay it back, you could just divide your debt by 24 – giving you a target of repaying £83.33 a month. Having a strict figure to meet each month may also help you budget more effectively.
Be careful not to spend unnecessarily on your student overdraft and try to repay any money you can while you are still studying. The last thing your future self wants is to leave university to a large overdraft bill looming over them.
However you plan to pay your way through uni, make sure to organise and allocate your finances ahead of time and try to stick to budgets. Following these tips will help you become a savvy spender by the end of the year.
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