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Students can face challenge to keep debts under control

School leavers heading off to college or university have good reason to be excited about the future, but they also face new financial responsibilities, and it takes discipline - starting with a careful choice of bank account - to stop debt spiralling out of control.

Figures from the Higher Education Statistics Agency show nine out of ten students graduating from Scottish institutions go into employment or further study, the highest rate in the UK.

And, with an average full-time salary of £21,000, they earn more than those taking courses elsewhere.

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Thanks in part to the lack of tuition fees for home students, Scots also tend to run up far less debt. Student advice website push.co.uk says the typical Scottish student owes around £8,500 by the time they graduate, compared to an English average close to £19,500.

But any amount of debt can be a serious burden. According to Lloyds Bank's latest Student Finance Report, four out of ten students struggle to meet their monthly outgoings and almost half are concerned about what they owe.

The only way to keep this to a manageable level is to develop good financial habits from the outset - and that begins with making a wise selection of student account.

Banks are keen to attract students as not only do they frequently end up paying huge amounts in fees and overdraft interest, a high proportion turn into life-long account holders. To entice them, they have traditionally offered a range of incentives.

But Sylvia Waycot, editor of independent comparison site Moneyfacts.co.uk, warns that many of these are not worth having.

She said: "The most popular incentive offered this year is commission-free currency. However, you can get commission-free currency from a number of places, so it is not a real incentive.

"Neither is the discounted insurance, which could be cheaper if you are willing to shop around. A discount in 'selected' shops is only a bargain if you shop in those places already, and is a £30 railcard worth a smaller overdraft limit?"

The account terms are what really matter, and for most students the free overdraft will be the most important of these. This year, the majority are capped at £2,000.

Bank of Scotland and Lloyds offer no fee, no interest borrowing of £500 in the first term, rising to a maximum of £1,500 by the end of year one and increasing again to up to £2,000 in years four to six.

At the Royal Bank and NatWest, account holders are also limited to £500 in term one but can arrange to borrow up to £2,000 from their second term. Barclays has an opening limit of £200, which again rises to £2,000.

Co-op Bank's free limit goes up from £1,400 in year one to £2,000 in year three, while TSB won't lend more than £1,500.

Santander's 123 student account allows free borrowing up to £1,500 in years one to three, up to £1,800 in year four and a maximum of £2,000 in year five.

HSBC offers a guaranteed

£500 overdraft in the first year, with a maximum of £3,000 after that. Halifax also sets an upper limit of £3,000, available from year one.

Clydesdale Bank has yet to announce its latest account terms, but it has not traditionally allowed any free overdraft, putting it out of the running for many students.

Even with other banks, borrowing at no cost is not an automatic right. It is generally subject to financial status, and anyone exceeding their agreed limit will face heavy charges.

The overdraft that will suit you best depends on how you will use it.

Ms Waycot said: "Are you likely to need the full £3,000 from year one, or are you concerned about taking on too much debt and would rather restrict the amount you can borrow?"

Also consider what will happen if you want to borrow beyond the agreed interest-free amount. The Royal Bank, NatWest and Santander don't allow additional borrowing.

HSBC will consider extending the free limit, but others charge interest. Halifax's rate is 7.2 per cent, while at Bank of Scotland, Lloyds and TSB it is 8.21 per cent. The Co-op charges 9.9 per cent.

Barclays' account is the only one with a daily charge, and at £1 per day, this could soon mount up.

For the rare few who are wealthy enough to stay in credit, TSB pays 5 per cent on the first £500. HSBC gives 2 per cent up to £1,000 but only in the first year, and Santander pays 1 per cent from £100 to £199, 2 per cent from £200 to £299 and 3 per cent from £300 to £2,000.

For everyone else, the key to financial health is to keep debt to a minimum by setting - and sticking to - a realistic weekly budget for essentials such as food, bills and travel plus a sensible amount for going out.

If at any time you start to feel things are getting out of control, talk to your bank and your student advice centre right away.

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