Ask Gareth Shaw: Is a graduate account the best option to help my son settle his overdraft?
Reply: Don’t be too hard on your son – I can’t imagine how weird and depressing it has been for him to graduate during a global pandemic and not be able to celebrate the fruits of his efforts at home. end of it all.
The good news is that there are many options to minimize the cost and stress of the debt your son has accumulated. Student bank accounts, which I guess he has, are attractive because they offer interest-free borrowing throughout the graduate years. But switching to a graduate bank account means there is no high interest rate cliff for your son when he is no longer a student.
Graduates’ bank accounts keep the offer of an interest-free overdraft for two or three years after graduation, but the interest-free amount decreases every year. The theory is that once the account holder wins, they can repay their debt according to the terms of the account, spreading repayments over time.
The market for these accounts is not uniform. For example, Nationwide’s FlexGraduate Account offers an interest-free overdraft of Â£ 3,000 in the first year after graduation, reduced to Â£ 2,500 in the second year, Â£ 1,750 in the third year, and Â£ 1,000 thereafter. This means that you will need to have paid Â£ 500 in the first year to avoid interest. On the other hand, the Santander Graduate Account offers an interest-free overdraft of Â£ 2,000 for two years, which means you don’t have to worry about making some level of reduction in the first year. However, in the third year, the interest-free overdraft disappears – so you’ll have to pay off all of your debts in 24 months.
Most of the banks that offer student accounts also manage graduate accounts, and it should be automatically switched to a graduate version. But that shouldn’t stop him from switching to an account that has a better overdraft offer. And contrary to popular belief, being overdrawn is not a barrier to joining a new bank. A bank can look at a graduate as a future customer – I ended up taking several mortgages with the bank that was my graduate account provider – and welcoming them with the offer of an interest-free overdraft.
The key here will be to make sure that the new account will cover the same overdraft as your son’s existing bank. The student bank account provider will require the debt to be repaid within a few days of closing the account, so you need to be sure that you can borrow the equivalent amount from the new bank.
A word of warning – these accounts were designed to help graduates pay off student debt. Failure to do this when moving from one interest-free level to another means that any borrowing greater than the interest-free amount will be subject to interest. Overdraft rates can reach 39.9% of AEOI
However, thanks to rules introduced last year, banks cannot charge daily or monthly fees when you are overdrawn and must be proactive in contacting a customer about their overdraft.
At the end of the graduate account term, the bank will likely transfer your son to one of their accounts free of charge. At this point, he should look at the market to see if he could get a better deal elsewhere, based on how he uses his account and what benefits are most attractive. It only takes seven business days to change accounts using the current account switch service.
Learn more about graduate bank accounts here.