Graduating from a post-secondary education can provide you with the skills and knowledge to establish a stable, fulfilling, and well-paying career.
It’s a commendable goal, but one hurdle you’re likely to face is the steep price tag.
For this reason, it might be necessary to finance your studies by borrowing money.
Two common ways to do so are using a student loan or a line of credit.
Here’s an overview of the two loan products:
|Student Loan||Line of Credit|
|Loan type||Installment loan||Revolving loan|
|Interest rate type||Fixed rate and variable rate||Variable rate|
|Typical interest rate||2% + prime rate for fixed-rated loan; equal to prime rate for variable-rate loans||Equal to lender’s prime rate|
|Repayment terms||14.5 years for full-time students; 9.5 years for part-time students||10 – 20 years|
|Primary eligibility criteria||Proof of Canadian citizenship or permanent residency; enrollment in minimum course load||Proof of income; good credit history; proof of enrollment at post secondary institute|
Student Loans Explained
A student loan is a credit product issued by federal and provincial governments to help individuals finance the cost of their post-secondary education.
Student loans are a type of installment loan, meaning you make regular payments over a predetermined schedule until you pay it off in full.
They come with fixed interest rates, but you have the option to convert to a variable rate before your repayment obligations begin.
Student loans in Canada are offered through the Canada Student Financial Assistance Program (CSFA).
They’re typically a combination of both federal and provincial financing.
In Ontario for example, the familiar, program name is OSAP.
You’re not required to repay your student loan for the duration of your program of study.
Also, interest charges do not accrue during your study period and for a six-month grace period following graduation.
Once your grace period ends, you must begin making regular payments.
Lenient eligibility criteria: Student loan administrators assess your application based on many factors, including personal circumstances that hinder your ability to cover your educational costs.
You can be approved even if you earn little to no income, and your credit score plays no role in administrators’ decisions.
Fixed interest rate: Student loans come with fixed rates, which will provide you with a stable and predictable payment schedule once you complete your studies.
You’ll never have to agonize over rising interest rates increasing your interest charges.
Deferred payments: You’re not responsible for repaying your student loan until six months following your graduation.
No guarantee of approval: You might not qualify for your desired level of financing.
For example, suppose you come from an affluent household or have a cash-rich savings account.
In that case, student loan administrators might severely limit your loan size or disqualify your application outright.
Less flexibility: You have less choice in tailoring your payment schedule.
Did You Know?
You qualify for an annual 15% tax credit on interest paid on your student loans.
Line of Credit Explained
A line of credit is a loan product that allows you to borrow money continuously up to a pre-set credit limit.
You can draw funds whenever you wish, and any principal you pay back is then available for you to use again, much like a credit card.
Interest charges only accumulate on the money you borrow.
There are lines of credit explicitly geared to help students cover their post-secondary education expenses.
They’re readily available at banks and credit unions.
Lines of credit come with variable interest rates based on your lender’s prime rate.
Many of the top banks offer rates equal to the prime rate or prime + 1.00%.
With a line of credit, you must commit to paying at least a minimum payment each month while pursuing your studies.
Usually, this payment only encompasses the interest.
Most lenders will provide you with a grace period once you graduate, typically lasting 6 to 24 months.
During this time, you’ll only have to pay interest charges that accrue.
Flexibility: You can borrow what you need precisely and when you need it, up to your credit limit.
The same applies to your repayment schedule, which you can structure to fit your budget.
Low rates: Interest rates on student lines of credit are exceptionally affordable; lender’s usually match their prime rate for well-qualified borrowers.
Access to more funds: If you possess a lengthy and positive credit history and earn an income, you might have access to more money than that offered through a student loan.
No deferral of interest: Interest immediately begins accruing on funds borrowed from a line of credit, which you must pay monthly.
No access to certain financial aid programs: Specific government financial aid programs are available only to student loan recipients.
For example, you won’t be eligible to receive grants from the Canada Student Grants program.
Co-signor might be required: If your credit history is non-existent or in less than stellar shape.
In that case, you’ll have to find someone to step in to co-sign your line of credit contract.
Suppose you fund your education using a student line of credit. In that case, you won’t have access to the Repayment Assistance Plan, which can provide financial relief by lowering your monthly payments – the program is available only for those with student loans.
Frequently Asked Questions
- Is a student loan a line of credit?
No. Student loans are a type of installment loan where you must repay the total amount borrowed according to a pre-set payment schedule. Governments issue most student loans in Canada.
Conversely, a line of credit enables you to borrow only the amount you need up to a pre-set credit limit. You pay interest only on the funds you borrow and have a more flexible repayment schedule. Lines of credit are a revolving credit product, as you can repeatedly draw funds up to your credit limit.
- Can I get a student loan with bad credit?
Yes. Your credit score isn’t a factor that governments consider when they review your loan application. Instead, they examine your present financial circumstances to determine the level of financing you require. These include your income, your parents’ income, whether you have dependents, your savings, the type of educational program you plan to pursue, and other criteria.