A university student relying on their student loan to fund their studies may occasionally require a little help with their living expenses, whether or not they are able to hold down a part time job. Student overdrafts have become increasingly popular as a temporary cash flow solution for those struggling to pay for rent, food, bills, textbooks and train tickets home due to the fact that most of them offer 0% overdraft rates.
What is a Student Overdraft?
A student overdraft is available to those who will be shortly embarking on their university experience or current students who need to supplement their existing loans or grants. Applicants must first have taken out a student current account; either while applying or at any time after their account has been opened they can ask for a planned overdraft, provided they will be regularly putting money into their account (such as student loans, grants or money from their family). The overdraft limit must be agreed with the bank and will depend on the condition of the student’s finances at that time, though the overdraft limit agreed is typically from £500 up to a comfortable £3,000.
Once a student account overdraft has been approved, cardholders may begin to borrow money if their account balance drops below zero, but are advised to start repaying this amount once they have the means of doing so.
Advantages of a Student Overdraft
These overdraft facilities are so appealing to students compared to credit cards and other financial products because they are usually offered on an unbeatable interest free basis. Unlike regular overdraft services, interest free student overdrafts don’t charge customers a penny in interest if they ever go overdrawn, and generally remain interest free between 1 and 3 years of a student graduating. To ensure they receive their money back, the lender will start charging interest after this time to persuade their customers to repay their debt.
An interest free student overdraft can be a great source of money as a last resort if it is used in the right way. Not only does it act as a cushion for students to fall back on if they ‘dip into the red’, but such an overdraft facility provides a secure and cheap opportunity for each borrower to learn how to manage their finances better.
Disadvantages of a Student Overdraft
Student overdrafts are very useful if the account holders are managing their bank accounts well; however if this is not the case they can face significant overdraft charges. Generally the split is between authorised overdrafts and unauthorised overdrafts: the former will have few if any attached fees, while the latter will come with hefty charges, meaning they can be expensive to run even if interest free.
There is also another potential disadvantage of student overdrafts. Considering students are already facing huge debts due to the rising costs of tuition fees, student account overdrafts may only add to this debt. Though the best student overdrafts appear to be those that offer limits of thousands of pounds, if such an overdraft is given in the wrong hands of someone who will see this additional cash flow as free money, it will more than likely encourage poor budgeting skills over the course of their studies.
If a student overdraft is nevertheless used for its intended purpose of providing short term financial support for struggling students, there are few financial products that are cheaper or offer the same benefits. The usual judgement of banks and building societies is that the majority of students will go overdrawn at some point while at university so they are encouraged to take up the best student overdraft deals offering interest free rates while they are still available.