What You Need to Know About Student Lines of Credit

Whether you are a student preparing for post-secondary or a parent, figuring out how to pay for higher education can be stressful. After all, college and university are expensive, especially if you are paying for everything yourself.

In Canada, the average yearly tuition for full-time undergraduate students is over $7,000, and that doesn’t include additional expenses like textbooks and rent.

While government student loans like the Ontario Student Assistant Program (OSAP) or the Alberta Student Aid can help, not everyone qualifies. As such, many students turn to what’s known as a student line of credit to help them pay for tuition, rent, supplies, and other expenses.

What is a student line of credit?

A student line of credit is like a regular line of credit in that it allows you to borrow money (subject to credit approval), but it’s designed specifically to help students while they’re in school.

Generally, interest rates are lower on a student line of credit than on a traditional one. Student lines of credit are intended to help students pay for expenses related to post-secondary education, such as tuition, buying textbooks, student housing, and more.

While students remain in school, they only need to make regular payments on the interest of the loan. Then, after they graduate or leave school, they will have to start paying back both the interest and the amount they borrowed (the principal).

Typically, after graduation, financial institutions offer a grace period where you still only have to pay interest. This allows you time to look for a job.

However, if you decide to quit school, you may be required to start repaying the loan immediately. See your student line of credit agreement for details.

How does a student line of credit work?

How much you can borrow often depends on your type of post-secondary education. For instance, general undergraduates can usually borrow up to around $80,000, while medical or veterinary students can sometimes borrow up to $350,000. Interest rates are typically around prime rate + 1%, though this can vary by financial institution.

One cool thing is that interest on a student line of credit only starts to accumulate once you withdraw the funds, and often, you pay only the interest while you’re in school. Then, once you graduate or leave school, you’ll need to start repaying both the interest and the principal (the amount you borrowed).

If you leave school without graduating, you might have to start repaying the loan right away. However, for those who graduate, financial institutions often give you a grace period where you only have to make interest payments, giving you time to find a job.

Who offers student lines of credit?

A student line of credit is a borrowing option specifically for students, available at various financial institutions, like banks or credit unions. Some of these top financial institutions include:

• BMO

• CIBC

• RBC

• Scotia Bank

• TD

• Desjardins

• National Bank

• Coast Capital

• Affinity Credit Union

However, these are not the only options out there. In fact, several other financial institutions also offer their own student lines of credit with varying credit limits and interest rates.

Therefore, if you’re on the hunt for a student line of credit, you’ll want to shop around at several financial institutions to find one that works best for your needs.

Are there different types of student lines of credit?

Not exactly. A student line of credit is a student line of credit. However, some financial institutions offer different credit limits based on your program or field of study. In this case, they could be labelled under different subcategories, such as:

• College/Undergraduate student line of credit

• Professional/Graduate student line of credit

• Medical/Dental/Veterinary Student line of credit

Some financial institutions offer these different subcategories, but not all of them. Also, for each institution that does, their credit limits and interest rates vary. If you’re looking for a specific subcategory for a student line of credit, be sure to check with several institutions to see what each one offers.

How do you qualify for a student line of credit?

To be eligible for a student line of credit, you usually need to be enrolled either full-time or part-time in a certificate, apprenticeship, degree, or diploma program at an eligible post-secondary school in Canada.

Also, because students often lack credit history, many lenders require a cosigner, like a parent or guardian, to guarantee the debt.

Since other eligibility criteria can vary between financial institutions, you’ll want to check with each financial institution for their specific requirements while you’re comparing different student lines of credit.

How do you apply for a student line of credit?

Applying for a student line of credit is relatively straightforward, but as we mentioned, it’s important to research your options first thoroughly. Some banks offer special lines of credit for certain programs or fields of study and higher limits for graduate students or medical students.

Once you’ve chosen which student lines of credit you want to apply for, you’ll need to:

Review your eligibility

Each lender has its own requirements, so you’ll need to ensure you qualify. For instance, some financial institutions may require you to be a full-time student, while others might accept part-time students. Some may require you to have an income, while others may allow you to have a co-signer.

Also, some may allow international students enrolled in a Canadian graduate program to apply as long as they have an eligible co-borrower.

Standard eligibility includes:

• Canadian citizenship or permanent residency

• Enrollment in a recognized post-secondary institution in Canada

Fill out the application

Now that you’ve confirmed your eligibility, you can apply for the student line of credit whenever you’re ready. Applications are typically made online, over the phone, or in person.

You’ll need your:

• Proof of enrollment

• Government-issued photo ID

Some financial institutions may also ask for additional documents, such as proof of annual income or an estimate of your educational costs.

Applications are typically subject to credit approval, but even if you have low or bad credit, you may still be approved with options like having a co-signer. If you’re required to have a co-signer, you’ll need their information, too.

How do you calculate interest on a student line of credit?

The interest rate you pay will vary with the financial institution’s prime rate and the Bank of Canada’s lending rate. It may also depend on whether you have a secured or unsecured line of credit and your credit score.

When you have a fixed interest rate, it’s easy to calculate your interest on a line of credit for the whole term. But student lines of credit typically have a variable rate, so there’s a little more to it.

Lenders usually calculate line of credit interest rates in Canada by dividing the annual rate by 365 to get the daily rate. They apply this rate to your daily balance, and at the end of the billing period, they add up all the daily interest charges.

This is the same method they use for fixed interest rates; the only difference is that instead of knowing your exact interest for the whole term, you’ll have to recalculate it every time your interest rate changes.

Let’s give you an example.

Say your interest rate for the billing period is 7.95% on a borrowed balance of $7,000, and your billing period is 30 days.

• (Balance × Interest rate × Number of days in the billing period) / 365 = Interest fee for the line of credit

• (7,000 x 0.0795 x 30) / 365 = $45.74

So, your interest-only payment for your current billing period will be $45.74. As long as your interest rate and your principal amount stay the same, your interest-only payments will remain that amount.

However, because you have a variable interest rate, if the Bank of Canada’s prime rate changes, you’ll have to recalculate your interest using the same formula but updating it with the new interest rate. Also, if you pay any additional money toward your principal amount, your rate will change as well.

Let’s say you paid an additional $150 onto your student line of credit, and your balance is now $6,850 with the same interest rate.

• (Balance × Interest rate × Number of days in the billing period) / 365 = ?

• (6,850 x 0.0795 x 30) / 365 = $44.76.

With your lowered principal amount, your interest-only payment for that month will be $44.76.

What happens to my student line of credit after I graduate?

Once you graduate, most lenders will convert your student line of credit into a personal loan. This means your interest rate might change, and you’ll enter a repayment period.

You’ll need to start making regular payments on both the borrowed amount and the interest that has built up. Also, you won’t be able to borrow any more money from it.

However, as we mentioned earlier, many financial institutions provide a grace period after graduation, during which you don’t have to start repaying the principal amount of your loan.

This gives you time to secure a job in your field before you need to begin making larger payments on newly converted personal loans.

These grace periods are typically six months, though the actual length of time will vary based on the financial institution.

Also, for certain programs, like medical or dental student lines of credit, some institutions or lenders may let you continue accessing your line of credit even after you graduate, while others might allow you to convert your student line of credit into a personal line of credit.

Is it better to get a student loan or a student line of credit?

Deciding between a student line of credit and a student loan in Canada depends on your preferences and financial situation. There’s no one-size-fits-all answer—they’re just different options.

Plus, you don’t actually have to choose one over the other. For example, say you used a student loan to pay for your tuition.

However, because you didn’t qualify for much, you’re now left with not enough funds to cover things like textbooks or rent for the rest of the semester.

This is where having a student line of credit can come in and work side by side with your student loan, offering a second option for you to cover your other expenses.

However, if you feel like you’d rather just have one or the other, here are some things to help you decide whether a student loan or a student line is better for you:

Borrowing flexibility

With a student line of credit, you have much more flexibility because you can borrow as much as you need, when you need it, up to your credit limit. On the other hand, a student loan usually approves you for a fixed amount. If you end up needing more than that, you’ll have to reapply for a second loan or look around for other options.

Interest rates

Student lines of credit come with variable interest rates, meaning they can change over time, which might cause your payments to vary each month. On the other hand, traditional or private student loans have fixed rates that stay the same throughout the loan term, making your payments more predictable.

Interest payments

With a student line of credit, you don’t have to worry about any annual or monthly fees; you need to make monthly interest-only payments while you’re in school.

In contrast, with a private student loan, you may be required to start paying back both the interest and the principal (amount borrowed) right away since it’s a loan and not a line of credit.

On the other hand, with a government student loan, you don’t pay anything while you’re still studying.

Plus, starting April 1, 2023, the Government of Canada stopped adding interest to all Canada student loans, including those currently being repaid.

However, there might still be interest on the provincial portion of your loan, depending on where you live. But again, you don’t start paying for it until after you’ve finished school.

Financial aid/relief

Government student loans often include financial aid options like grants, bursaries, loan forgiveness, and repayment assistance programs (RAP).

For example, if you have a government student loan, you can take advantage of Canada’s Student Loan Repayment Assistance Plan (RAP), which helps students who are having trouble repaying their loans. You can apply for this assistance every six months.

Unfortunately, this isn’t available when you borrow money through a student line of credit or private student loan.

The bottom line

If you’re looking for a way to finance your post-secondary education, a student line of credit can be a flexible option, allowing you to borrow as much as you need, when you need it, up to your credit limit.

You can use it on its own or in combination with a government student loan to help you cover educational expenses, including textbooks, exam fees, student housing, rent, and more.

Just remember that this is borrowed money, and you will have to pay all of it back once you’ve finished school, so it’s important to stick to a budget and only use what you need.

And if you’re looking for other ways to help you with your expenses while in school (without going into debt), consider KOHO’s instant approval virtual credit card.

This prepaid credit card allows you to earn up to 6% cashback when you shop with your card in-store and online.

Plus, because it’s a prepaid card, there are no high-interest fees. You just load it up with your own money and use it like a regular credit card.

KOHO also offers several other finance options that may benefit you as a student, including earning 5% interest on your entire balance, free credit score checks, and credit-building options. Learn more at https://www.koho.ca/.