During an interview, a BBC reporter asked me what I'd tell students to stop them going into debt. I replied that it was a stupid question. Students must accept the need to borrow, it's virtually enforced. The real question is, what's the right way to fund, borrow and live as a student?

No-one in the UK should be put off studying because of potential student debt. Done right, it's very different to normal debt. It's only repaid when you finish studying, and if you don't earn enough when you leave (and of course one reason for studying is to enable you to earn more) you don't have to pay for it!

In this guide

• Education costs
• Where to borrow from!
• Hidden Scholarships & Grants
• Student MoneySaving
• Students and Tax
• Other Articles/Discuss

Ensure you're up to date

When living as a student it's important to keep on top of your finances. Ensure you get the free weekly Money Tips Email which includes crucial alerts about short-lived ways to beat the system and put cash in your pocket. Plus you can join scores of students chatting in the Forum's Student MoneySaving section.

Education Costs

There are many costs to consider when entering higher education; books, transport, living expenses and of course socialising. Plus there's now also a ‘tuition fee' where you pay a cost for studying that can be up to £3,290 a year.

You needn't stump up cash for tuition fees

What's crucial to understand about tuition fees is that although you pay them when you go to university, you're usually lent the money and then you repay it when you finish, once you're working and earning enough. The amount you pay for fees will go up each year, but only by around £100.

If it's likely that, like most students (except perhaps mature students) you won't have any major income or savings of your own, then it's important to accept the cash is going to come from borrowing and sometimes from parents.

The right type of borrowing

Sadly in the UK, students are educated into debt but never about debt. Many in authority bluntly and ignorantly concentrate on telling students to avoid debt, which is impossible, rather than focusing on avoiding bad debt.

One consequence of tarring all debt with the “booh hiss” brush is that when students borrow, many don't delineate between the best type of borrowing, student loans, and the rest. This leaves them mired in bad debts from many sources, meaning they start their working life damaged by financial problems and already swept into the debt culture. So let me start by saying:

“Some types of debt are MUCH better than others.
All debts are not the same!”

Do you know what an interest rate is?

An interest rate is the cost of borrowing an amount of money. Borrow £1,000 at a 15% annual interest rate and at the end of the year you'll owe £1,150. Yet the real danger of interest is that it compounds, in other words borrow over a long period and you end up paying interest on the interest on the interest; and this means what you owe rapidly accelerates (£1,000 borrowed at 15% over ten years means you'll owe £4,000).

This is a crucial concept in student life and beyond. If you don't understand it, please take five minutes to read the Interest Rates: Beginners' Guide.

Full guide to student MoneySaving

Filmed live at LSE's Peacock Theatre

Part 1: Good debt, bad debt | Part 2: Companies aren't your friends | Part 3: Student MoneySaving Q&As

Where to borrow first

Once you accept all debts aren't equal, the key question is which are the right debts? And luckily it's easy to draw up a strict order of priority:

• THE FIRST PORT OF CALL. Official student loans

  The official Government-backed Student Loans Company (SLC) loans are the cheapest long term debt you'll ever get (currently it's 1.5%) and should always be the first place to borrow from. You're given two loans, one to cover tuition fees and one for maintenance (a living allowance).

  There's nothing to repay until after graduation or you leave, and then the less you earn the less you have to repay. Plus, if you always earn less than £15,000 you won't have to repay it at all. For full details of exactly how this works read Student Loans: Everything You Ever Wanted To Know.

• IN SECOND PLACE. Student bank account interest-free overdrafts

  Big high street banks are desperate for students' custom (they hope it means potential high earners will stick with them for life) and thus they dole out interest-free overdrafts to draw them in. An overdraft means you can spend more money than there is in your account (i.e. you borrow it). Normally it's expensive, but for students it's usually 0% up to a set limit, in other words you don't pay to borrow this money.

  As it's interest free, and the SLC charges interest, you may ask why this isn't the first port of call. The answer is that once you're no longer a student the banks will start charging an expensive commercial rate of interest, whereas student loan debt always remains cheap.

  To find the right student bank account (even if you're already a student, as you can switch and gain) read the Student Bank Account guide.

• IN THIRD PLACE (AND TO BE AVOIDED). All other debts

  Pretty much any other debt out there is to be avoided. This is basically anything charging a commercial rate of interest (as a rough rule of thumb let's say above 6%) such as credit cards and bank loans. After all, if you don't have an income you can't repay the debts which means the interest will compound and build quickly leaving you owing serious cash.

Grab other grants and scholarships

On top of the official financial support, other funding sources are available too, if you know where to look:

• At your University/College and Students Union

  If your tuition fees are the full £3,290 and you're eligible for an entire Maintenance Grant, your uni will have to give you a £329 bursary (which doesn't have to be repaid) though, as the average pay-out is £900, you may get more. Students suffering financial hardship may get access or hardship funds; there is no one definition for ‘hardship' so if you feel you need it, apply!

  Also try the university's welfare department; student parents, those with disabilities, or other special circumstances may receive extra cash and those studying medicine and related subjects or new teacher training students also have payments available. Plus try the Students' Union, it may have its own independent hardship fund and be able to help out there.

• Scholarships for everyone.

  Whether you're short of cash or not, there are bags of scholarships for academia, sports, hobbies or even just for being the child of an airline pilot. There are some very bizarre ones out there – check!

  Use the Scholarship Search website, or go to a local library for a wider range of grant directories. The Educational Grants Advisory Service also offers info on alternative funding, including educational trust funds. Further grant giving ideas are listed in the Grant Grabbing guide.

MoneySaving in student life

Student life isn't so different. There's a set amount of money coming in, and that's what you've got to spend. Yet while for most adults the mantra is ‘don't spend more than you earn', for students it's ‘don't spend more than you've got' as much of the cash is borrowed anyway.

As a rule of thumb aim to live off the official student loan, any money from parents, and some, but not all, of the 0% overdraft from the bank (it's 0% now, but it'll need repaying later, and possibly at a commercial rate of interest) and no other borrowing. Read the Money Makeover guide to make sure you're squeezing the most out of all your money products.

Spend more than you've got, and you'll build up more debts, and as you're a student if you've exhausted all the right debts, the alternative borrowing isn't good at all!

There are a number of basic steps to ensure you don't get into money trouble:

• Pick the top student bank account.

  Don't just use the bank located at your university or the one you had your account with in your teens. There are massive differences between student bank accounts and choosing the correct one puts serious cash in your pocket: read the Best Student Account guide.

• Remember a company's job is to make money from you!

  This isn't a trite statement, it's crucially important. As a student you're effectively entering the adult financial world for the first time. It's too easy to believe companies' promises and marketing.

  Always remember “they want my cash” and look with a sceptical eye; you'll make better decisions. Do your research. It's easy to assume mobile phones, supermarkets, gym membership, TVs, gas & electricity bills, car and home insurance and other prices don't vary too much – but they do.

  Making the right financial decisions can literally keep £1,000s in your pocket a year. This site is dedicated to helping you do that; the other articles apply just as much to students as anyone else (don't automatically believe ‘student specials' are best, always compare them to the best mainstream product). Most importantly, ensure you're getting the free Weekly Money Tips Email so you don't miss out.

• Budget.

  Everyone needs to budget, by planning their spending. It's never more true than when you're a student. Doing this keeps you in control of your expenditure and ensures you're not left without cash. For full details use the free Budget Planner tool.

• Use my Money Mantras.

  There are two easy money mantras, one for when you're skint and one for when you're not. Before you spend money on anything ask yourself these three questions.

• Partying costs.

  For many students, partying is part of the lifestyle. There's nothing wrong with spending on partying, just ensure you budget for it, like everything else in life.

  And remember if you get excessively drunk, it's not just your potential health and self-respect that's at risk, your judgement of what's reasonable spending disappears too – leaving you to wake up with a hangover and depression that you've blown a week's budget (see Drinkaware). So plan when you're going out and when you're staying in, no-one can afford (financially or physically) to party every night, so don't feel pressured into doing it.

  And if you come across drugs, beware, they're hideously expensive, and terribly damaging to a student's finances, never mind the potential legal, lifestyle, medical and psychological dangers (see Talktofrank).

• Don't get the ‘spend it before it goes' bug.

  When the loan cash arrives, it's all too easy to celebrate with a big blow-out. Of course we all want a splurge, but the time to do it is at the end of term, when you've carefully managed your money and know you've got some spare, not the beginning, leaving you short and struggling for months.

• Use your student card and ask for discounts.

  Many places will give you a discount if you flash your student (or NUS) card, which costs around a tenner. Yet even if they don't offer it why not ask for one? Many places will help you out if you haggle. It's chutzpah time. Never buy without a try.

• Get a job.

  While studying is a priority, it's become commonly accepted now that many students will work so if you don't have enough cash, don't over borrow, try to find a job instead. The earlier you try to get work in the year (try and arrive before other students) the better your chances.

Yes, students do pay tax!

Sorry students, you aren't special, you pay tax just like anyone else. The reason many people assume student life is tax free is that no one pays tax on the first £6,475 of income earned each year, and as many students don't earn that, they never pay tax. However there is one piece of good news; neither the Student Loan nor the Maintenance Grant count as income, therefore they're untaxed.

If you earn less than £6,475 and only work during the holidays, ask your employer for a P38(S) form (or you can downloand it directly from HMRC) and you'll be paid tax-free. If you work throughout the year, then you need to pay tax as you earn. If you earn under the threshold, contact your local tax office to reclaim any overpaid tax at the end of the tax year (5 April).

Also, if you do save, make sure you use your tax-free Individual Savings Account (ISA) allowance to minimise the amount of tax you pay on savings (see the Best Cash ISA guide for the top paying accounts). You may ask ‘if I don't pay tax, why bother with an ISA?'. The answer's simple, you mightn't pay tax now, but probably will once you start working.

You're allowed to save £5,100 in a cash ISA each tax year so by putting it in there now, you're protecting the cash from being tax-deductable in the future.

NOW READ PART II:
Student Loans: How To Use Them The MoneySaving Way