How to Budget to Attend a University: Be Aware of the “Free Money” Trap

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British financial provider Nationwide recently published a survey on university finances in the UK and pointed out that 7 in 10 students strongly agree that meeting the costs of attending their university was one of their biggest concerns. In order to balance their books, students are managing their budgets in various ways, and living on their own, with their own plans and strategies, should be encouraged to avoid nasty results after university, says one expert.

Money for education

This research has examined data provided by Censuswide in June, 2019 that covered over 1000 university students or those who have recently graduated (aged between 18 and 24). The average income of students per month during their university years is £690, and 31% report that they have less than £500 to live on, including money from jobs and student loans, while their monthly costs are £1047.

Rent is certainly the largest expense

It’s usually the first time for most students to run a household themselves, and rent is certainly the largest expense (£357), followed by food, utilities, insurance and travel. Mr. Carl Burke, the Head of Current Accounts at Nationwide, says this is exactly the challenge, particularly for students who acclimatize to independence, not only because of the number and amount of expenses but also because they will need a long-term and steady income plan to cover their costs.

Covering those costs is why many students choose to earn while they learn through jobs in shops, restaurants and bars,” said Mr. Burke to Youth Time. Therefore, although 39% of lucky students say they have support from the bank or their parents to be free from financial concerns, the majority (61%) have to take a job at university to ease their burden. The average work commitment is 12 hours a week, with some respondents working as many as 20 hours a week.

Borrowing money is inevitable

Mr. Burke believes this is the most effective approach and a smart move for all students. “Learning to manage their finances is an important life skill, which will help them when they move on from university into the world of work.” However, borrowing money is inevitable, and if they need to borrow money on top of a student loan, 60% of respondents say they’d turn to a student loan, 35% to overdraft, 21% to bursary, and 16% would look into getting a credit card.

The biggest financial support students prefer is also their largest concern: 42% say student loans bother them the most, and that figure increases to 53% in students aged 18-19. Mr. Burke believes that this is a responsible attitude: “Many students leave university with debt, so it’s important that they understand their options to ensure they don’t become more indebted than they need to. Taking a sensible approach to debt and considering an overdraft as a sensible approach to borrowing, can make a real difference when it comes to their finances.

Careful with overdraft

However, compared to student loans, overdrafts are not seen as a big issue; and 40% students don’t consider it to be serious debt.  A few of them even regard it as totally free money. Mr. Burke, however, warns that although interest-free arranged overdrafts for a set period will be a good help to students’ budgets, they should be aware of its risks. “An overdraft isn’t free money though – you will need to pay it back, and you may end up being charged interest or fees on top if you stay overdrawn after the time limit of the special deal.

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. This can help with cash flow by adding an element of flexibility, but the bank could charge students without authorization if they exceed their overdraft limits. Besides, the interest rate applied is nearly always variable, making it difficult to calculate the borrowing costs accurately. An unauthorized overdraft will also lead to additional charges and fees, which can lead to a spiral of debts.

Research in 2018 showed that a significant minority of students are struggling with the risks of debt spirals caused by overdrafts. Mr. Burke suggests that students ask their bank about precise policies respecting overdrafts and choose the right account wisely to avoid falling into a spiral of debt even with seemingly insignificant overdrafts: “Many banks and building societies offer student accounts with special deals to help you during university, like interest-free arranged overdrafts for a set period. Having this facility may help you budget.”

Photo: Shutterstock

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