How does a student line of credit work?

The truth is, as a post-secondary student, you have a lot to worry about on top of your academic workload, especially when it comes to your finances. From tuition fees, living expenses, and other school expenses, being a student can be pricey.

Luckily, with a student line of credit, you can enjoy student life without having to stress about your financial needs until after you've walked across the stage with your degree in hand. To learn more about credit lines and how they work, stick around for more info!

What is a line of credit, and how does it work?

A student line of credit is a type of bank loan or credit designed specifically with the needs of students in mind. With a line of credit, you'll be able to borrow money as you need (up to your credit limit), pay it back, and borrow it again, which means budgeting in college just got a whole lot easier. However, like any line of credit, you'll need to pay interest on the money you borrow.

What are the benefits of a student line of credit?

A student line of credit offers a ton of benefits and features that give students flexibility and freedom, including the following:

Students get a grace period after they graduate

Most financial institutions offer students flexible repayment terms once they finish school. This grace period allows you to pay only the interest on the money you borrow before you need to begin paying back the principal amount and the interest combined.

Depending on the financial institution, you won't have to start paying the principal for six to 12 months following your graduation date.

Access funds wherever, whenever you need

Student banking with a line of credit gives you convenient access to your money. For example, a lot of student lines allow you to move money directly into your chequing account, which you can access at any ATM.

You'll also be able to control your flow of money using your online banking app at all times.

Interest only payments

Students enrolled in post-secondary education will also benefit from the interest-only payments during the time they're in school. So, how does this work? Essentially, with student lines, your financial institution will let you pay interest on the money you borrow from your account each month rather than the actual amount you borrow.

As we mentioned, you won't have to start repaying the principal amount until you've graduated, which will give you some leeway to repay your loan until you're in a better financial situation.

Keep in mind, however, that you also have the freedom to pay more than the interest payments if you want to reduce your principal. It's all up to you!

Only pay interest on the money you borrow

Another great feature of a student line of credit is that you'll only pay interest on the money you borrow. For example, if you're approved for a credit limit of $50,000 in Canadian dollars and only spend $13,000 during the time you're in school, you'll only be charged interest on the money you spent rather than the outstanding balance.

You're in charge: spend what you need up to your credit limit

A student line of credit works with you in control. You'll get to access credit on your student line at your convenience and borrow money as you wish up to your credit limits. For example, if your credit limit is $25,000, that is the maximum amount of money you'll be able to spend during your time in school.

How can I spend my student line of credit?

With a student line of credit, you'll be able to spend your money on textbooks, tuition fees, housing, meals, transportation, and other costs you may have along the way. And, if you want to be smart with your money while in post-secondary school, make sure you take a look at some of the hidden costs students can avoid so, you never have to worry about how much of your available credit you have left each semester.

What are the disadvantages or risks of having a credit student line?

Just like there is a risk of personal loans for Canadians, loans for students in Canada also come with some disclaimers that you should know about before signing a credit agreement. Here's what you need to be aware of:

Interest rates can change

Like most lines of credit available, the interest rates for student lines are variable and dependent on the Bank of Canada, meaning that each month, there is a possibility that your interest rate will change. Because of this fluctuation, what you pay each month can change. So, to prepare for an interest rate change, make sure you budget accordingly and keep this in mind when considering your plans for spending and saving.

On a more positive note, having a higher credit score can help you secure competitive interest rates when you apply for your student line of credit. To improve your score, build your credit with KOHO and get a free credit score check to see what your current standing is.

Your co-signer shares your risk

With a student line of credit, you'll need credit approval from your financial institution before you're able to borrow money. If, by chance, you aren't approved, your line of credit will need a co-borrower, which is usually a parent or guardian with a longer credit history.

Having a co-signer isn't necessarily something to worry about until, for some reason, you aren't able to pay your interest payments each month. In this scenario, your parent or guardian takes on that debt and will be responsible for paying the interest in your place, which could lead to some uncomfortable conversations at the dinner table.

It could lead to debt

With any type of bank or student loan, having a student line of credit could lead to a significant amount of debt should you choose to mishandle the money you borrow. Just because you have a high credit limit doesn't mean you need to spend the entire amount if you don't need it. To prevent this, you'll need to budget ahead of time and spend your money responsibly while you're in school.

It can impact your credit history

These types of loans for credit building can make or break your financial health. Making your payments on time is essential when it comes to a student line of credit, given that your payments or non-payments will directly impact your overall credit score.

In the future, if you plan on owning a home, renting a property from a landlord, applying for a virtual credit card, or taking out another type of loan, you'll need a high credit score in order to do so successfully.

More money borrowed equals more interest owed

And finally, the more money you borrow, the more interest you'll owe at the end of the day. So, if you plan on getting a student line of credit, you'll need to make sure you don't dig yourself into a hole of debt by the time you graduate. The credit limit you're given should only be used as a point of reference rather than the maximum amount you should spend.

Ultimately, budgeting your monthly expenses is the best way to avoid taking on more debt than necessary.

Is a student loan different than a student line of credit?

A student loan and a line of credit are not the same thing, despite people using these terms interchangeably. A major difference between the two is the flexibility that they allow students. While a line of credit offers students the flexibility to spend what they need up to their credit limit, a student loan is a fixed amount that's presented to students, and that's it. So, if you spend the entire amount of your student loan, you'll need to reapply for another one for more funding while you're in school.

Another difference between the two is that student loans have a fixed interest rate, meaning that, unlike a line of credit, you won't be affected by interest rate fluctuations. And, when it comes to repayments, student loans typically have fixed payment periods you'll need to follow, while a student line of credit offers you more leeway in terms of payment schedules.

How long do you have to pay off a student line of credit?

Realistically, you have as long as you need to pay off your line of credit. Just keep in mind that the longer you take, the more interest charges you'll end up paying in the long run. While you're a full-time student, you'll only need to pay the interest on the amount you borrow rather than the principal amount.

How can I apply for a student line of credit?

Are you leaning toward a student line of credit? Here's how to get a bank loan credit line:

Check if you qualify for a student line of credit

Before applying for a line of credit, you'll need to confirm whether you fit the eligibility criteria mentioned below:

• You are a Canadian citizen or permanent resident enrolled in a Canadian educational institution.

• Students enrolled must be in a certificate, apprenticeship, degree or diploma program.

• Other professional degrees include a master's degree and PhD program.

• International students enrolled in a Canadian graduate program require a co-signer. The co-borrower must be a Canadian citizen or permanent resident.

Fill out an application form

Once you've confirmed your eligibility, you'll need to fill out an application form with the financial institution you wish to get the loan from. You can either do this online or in person. The application will ask you a variety of questions about your finances, educational institution, and more.

Now that you've completed the application form, you can submit it to the financial institution. There may be a waiting period, depending on their specific approval process.

Get your credit line approved

Congrats--you've been approved for a student line of credit! Once you're approved, you'll need to sign a series of documents confirming that you understand the terms and conditions of your loan. After everything is signed, you'll be able to access your credit right away.

Other financial options for students

If a credit line is something you're not too sure about, or if you're looking for more available funding while you're in school, there are other options out there to ensure you're able to get the money you need:

Canada student loans

Whether you plan on being a full or part-time student, there are thousands of student loans and scholarships available. Some may be available from the Canadian government, while others are funded by private organizations.

Credit cards

You may also want to consider credit cards for everyday spending. There are numerous credit cards available for Canadians, as well as new Canadians! Most cards come with a different annual rate and offer different benefits. So, make sure to compare cards and find an interest rate that works for your finances.

Don't forget to make your payments on time, so you can watch your overall credit score flourish and secure your financial future!

Get a student line of credit with KOHO

Being a student is stressful enough. But with the help of KOHO, your academic journey can be a breeze. Whether you're looking for a student line of credit or considering a high-interest savings account with overdraft protection coverage, KOHO has got you covered so you can graduate in good standing financially.

Interested in what KOHO has to offer? Let's connect and get the ball rolling before your next semester starts!