Student Loan vs Line of Credit: Which Is Right For You?

The main difference between a student loan and a line of credit is that a student loan is an installment loan with a set monthly payment and a set term to pay it off.

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.

Student Loan vs Line of Credit

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.

Advantages

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.

Disadvantages

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.

Advantages

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.

Disadvantages

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.

Fact

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?
  • Can I get a student loan with bad credit?

Mark is a freelance writer who specializes in covering personal finance topics related to investing, mortgages, credit cards, and more.

He is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.