A primer for parents on the ties that bind

Student loans

Borrowing from the government-backed Student Loans Company is cheap. The interest rate is now 2.3%, and will fall to 1.3% on September 1 because inflation has come down.

This is lower than the interest on deposit accounts, so you are better off leaving your savings untouched and encouraging your offspring to apply for an SLC loan even if you can afford to meet the full cost of putting them through university. In 2002-3, all students can borrow the basic loan entitlement. They may be allowed more, depending on a local education authority (LEA) means test of student and parents.

This test also decides whether they qualify for help with the tuition fee of £1,100. If the family income minus pension contributions in 2002-3 is below £20,480, the LEA pays the whole tuition fee, and a student can apply for the maximum loan. If family income exceeds £30,502, a student can still apply for the maximum loan but the LEA expects parents to stump up the full tuition fee.

Parents with income between £20,480 and £30,502 are expected to pay only a proportion of the fee.

Families on around £40,000 are expected both to pay the tuition fee in full and to top up the basic loan by making a voluntary contribution to living costs - £2,305 a year to students in London; £2,075 to those elsewhere; and £1,870 to anyone based at home.

The good news for parents whose child's first term at university is imminent is that if you have more than one child at college, the LEA expects you to pay for only one of them. The bad news is that, spread over the year, this means finding up to £1,500 at the beginning of the autumn term, and £400 for both spring and summer terms.

Parent top-ups

While it makes sense to use student loans, perhaps the biggest boost a parent can give a child is to help avoid large overdrafts and credit card debts.

So, with the NUS calculating that living costs can add up to £23,000 over three years in London, the sooner you start saving, the better.

Graham Hooper, of Bristol independent financial adviser Holden Meehan, says: 'If your child is starting college within five years, you're best off keeping your savings in a mini cash Isa.

'If you have longer to go, consider equity-based Isas such as Credit Suisse Income or Fidelity Special Situations.'

If your son or daughter is starting in the autumn and you have no savings, David Hollingworth, of the Bath-based mortgage broker London and Country, suggests remortgaging to a flexible or current account loan. This enables you to withdraw equity from your property, and repay when you can afford it.

Hollingworth recommends the Woolwich Open Plan Offset Mortgage: 'You could take out £30,000 more than you need to cover your existing mortgage, then pay the £30,000 in the current account part of the account. This would be offset against the amount you owe, reducing the interest to pay while allowing you to withdraw cash when your child needs it.'

Overdrafts

High street banks are keen to sign up students, hoping they will turn into profitable, long-term customers. Most offer student accounts with overdrafts that are interest-free provided they are pre-arranged. Expect hefty fees and interest charges, however, for unauthorised overdrafts.

Lloyds TSB offers the biggest overdraft facility for those on a five-year course, with a £1,500 limit in years one to three, rising to £2,000 in years four and five. For students on a three-year course, the Co-op bank's £1,800 limit in year three may be more tempting.

Unless you are very disciplined, check the interest rate and charges on amounts beyond the bank's interest-free limit.

The Bank of Scotland offers an interest-free overdraft up to £2,000 for five years, but its authorised interest rate is 5% above base rate (now 4%, but likely to rise this year). Its unauthorised rate is 22.5% above base. It imposes an £8.50 penalty on unauthorised borrowing and charges £20 for sending a letter telling customers they are overdrawn without agreement.

Abbey National charges £15 every time the overdraft limit is exceeded, on top of its £15 a month fee.

Check out graduate packages as well. Lloyds TSB usually transfers students to its graduate package in the December following graduation. This includes an interest-free overdraft up to £2,000 for three years and access to a graduate loan up to £10,000 at 7.8% APR over five years.

Credit cards

Cards aimed at students, such as the Student Barclaycard, offer helpful student-friendly extras such as cash-back on purchases and discounts at book and record shops, but they make no concessions on interest rates. So it's probably a good thing that students - regarded as high-risk customers - typically get a lowish credit limit of £300 to £500.

Parents prepared to share their higher credit limit, and possibly lower rate of interest, with student offspring can make them additional holders. This is sensible only if you trust them.

This correction appeared in the Observer's For the Record column, Sunday June 23 2002

In 'A primer for parents on the ties that bind' an editing error led us to state that parents with more than one child at college are only expected to pay for one of them. This was incorrect. Parents are expected to share their contribution equally between their children. For example, parents with a residual income of ?26,000 are expected to contribute ?626. Where they have two children at university, that contribution is divided equally. Where the contribution for each child is less than the maximum tuition fee of ?1,100, no further input is expected towards living costs.