Student Loan vs Student Line of Credit

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 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 and for a six-month grace period following graduation.

Once your grace period ends, you must begin making regular payments.

While student loans are not forgivable in Canada, interest is no longer charged.

Similarly, the Canada Apprentice Loan offers those in an apprenticeship program a $4,000 interest free loan.

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.

Student Line of Credit Explained

A student 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

The biggest disadvantage of getting a student line of credit is that it can lead to high levels of debt if not managed carefully.

While a student line of credit can be a useful tool for financing education-related expenses, such as tuition fees or living costs, it is important to remember that it is a loan that needs to be paid back with interest.

Many students may already have other forms of debt, such as student loans, and taking on additional debt can make it difficult to manage finances and achieve financial goals in the long term.

Additionally, if a student is unable to make the required payments on their line of credit, it could negatively impact their credit score and make it more difficult to obtain credit in the future.

As with any financial decision, it is important for students to carefully consider their financial situation and seek professional advice before taking out a student line of credit.

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.

Frequently Asked Questions