What is a student line of credit?

A student line of credit is a special kind of student loan designed to help students pay for their post-secondary education. Unlike regular loans, you can borrow money, repay it, and borrow again as needed, up to your credit limit. This flexibility lets you take out only what you need when you need it.

Student lines of credit are designed to help cover costs associated with post-secondary education, like tuition, textbooks, and student housing. To be eligible, you need to be a Canadian citizen or permanent resident enrolled in a certificate, apprenticeship, degree, or diploma program at a Canadian post-secondary school.

Interest on a student line of credit only starts to accumulate once you withdraw the funds, and you can often defer making principal payments until after you graduate. Once you graduate or leave school, you’ll need to start paying back both the interest and the principal (the amount you borrowed). This setup is great for students who might not have a steady income or enough savings to cover their education expenses.

Usually, after you graduate, financial institutions give you a grace period (where you still only have to make interest-only payments), giving you some time to find a job. However, if you leave school without graduating, you might need to start repaying the loan right away. Be sure to check your student line of credit agreement for specific details.

Student lines of credit offer an alternative to government student loans, like OSAP in Ontario.

What are the benefits of a student line of credit?

Student lines of credit are tailored specifically for students, making them a better option than credit cards or personal loans. Given that students often have limited income while in school and typically start their jobs with lower salaries, these credit lines are designed to fit these circumstances. They offer benefits like:

You get lower interest rates

One of the main advantages of a line of credit is that the interest rate is always lower than on a credit card and often equal to or lower than on a personal loan. These interest rates are usually tied to the bank’s prime rate but can sometimes be personalized based on factors like your degree, program, employment, and other criteria.

You can use the money as needed

Once you have a student line of credit, you can take out money whenever you need it. Do you have a few more textbooks to purchase? Need to pay your exam fees? As long as you haven’t reached your credit limit, you can withdraw the money at any time.

Plus, if you start repaying your line of credit early, you can withdraw that money again if needed.

You’re only charged interest on what you borrow

Unlike with other types of loans, you’re only charged interest on the amount you actually take out, not the full credit limit. For example, if your credit limit is $15,000, but you’ve only withdrawn $8,000, you only pay interest on that $8,000.

You only have to pay the interest while in school

Until it’s time to pay back your line of credit (which is typically not until after you’ve completed your schooling), you won’t have to worry about any annual or monthly fees, and you don’t have to make monthly payments on the money you borrowed—just the interest. This means you can spend less time earning money to pay back your line of credit and use that time to focus on your schooling.

You get a grace period after graduation

Financial institutions often offer a grace period after you’ve graduated where you don’t have to start paying back the principal amount of the loan just yet. These grace periods are often six months, though they may be longer. This grace period allows you time to find and establish a job in your field before you have to start making larger payments on your line of credit.

You can build your credit score

As a student, you likely won’t have much of a credit history yet. This is where having a student line of credit can help you shine. Making your interest-only payments on time each month can boost your credit score, as this responsible behaviour gets reported to Canada’s credit bureaus and added to your credit report. It’s an easy and effective way to establish a good credit history. A strong credit score after graduation can open doors to unsecured credit cards, rental opportunities, mortgages, and even better jobs.

How does interest work on a student line of credit?

Now that you know more about what a student line of credit is, let’s talk about how the interest on a line of credit works.

With a regular loan, you’re charged interest on the total amount loaned to you. But with a student line of credit, you only pay interest on the unpaid balance from the previous month’s billing cycle.

What this means is if you’re approved for a $15,000 line of credit and borrow $8,000, you’ll only be charged interest on that $8,000. And until you withdraw the money, you won’t owe any interest. Interest starts accruing the day you withdraw money and continues until you pay back the full amount.

So, say you were approved for your student line of credit near the beginning of August, but you don’t withdraw any money to pay for your schooling until the first week of September. In this case, you wouldn’t have to pay any interest throughout the month of August because you hadn’t withdrawn the money yet.

Student line of credit interest rates are tied to the prime rate, which banks typically offer to their top customers. In Canada, for undergraduates, the rate is typically prime plus 1% or higher. Graduate and professional students usually receive a rate at prime. Medical and dental students often benefit from a discounted rate, such as prime minus 0.25%. Most lines of credit use simple interest rather than compound interest.

What’s the difference between a student line of credit and a personal loan?

You’ve seen us mention personal loans, so how does a personal loan vs. a line of credit differ?

Well, a student line of credit works similarly to a credit card. You have a set credit limit and can use the money as needed. While you are a student, you only need to pay the interest on what you’ve used. It’ll likely have a variable interest rate, which means how much interest you owe each month may change.

With a student line of credit, if you decide to pay back more than just the interest during your draw period, you can later re-borrow that money if you need it. Plus, you won’t have to start paying back the principal amount until after you’ve graduated.

On the other hand, a personal loan requires you to pay back the borrowed amount on a set schedule. Typically, you’ll have to start repaying the loan while you are still in school. However, if your personal loan has a fixed interest rate, at least you’ll know exactly how much you are paying back each month.

Also, say your tuition increases for the following year, or your laptop meets an untimely demise, and you need to borrow more money. Unlike with a student line of credit, you’ll have to apply for another loan to borrow more.

What is the difference between a student line of credit and a government student loan?

A government student loan is a type of financial aid provided by the government (provincial and/or federal) to help students with post-secondary education costs. Similar to a student line of credit, these loans are available while you’re in school and need to be repaid after graduation. However, there are key differences in terms of interest, grace periods, and post-graduate financial assistance.

Interest

With a student line of credit, you have to make monthly interest payments while you’re in school. But with a government student loan, you don’t pay anything while you’re still studying.

Additionally, starting April 1, 2023, the Government of Canada stopped adding interest to all Canada Student Loans, including those currently being repaid. However, depending on your province, there might still be interest on the provincial portion of your loan.

Grace Period

For Canada Student Loans, you get a 6-month grace period after you graduate, during which you don't have to make any payments. On the other hand, the grace period for a student line of credit varies by financial institution, with some offering up to a 12-month grace period.

Repayment Assistance Plan (RAP)

If you have a government student loan, you can access Canada’s Student Loan Repayment Assistance Plan (RAP), which helps students struggling to repay their loans. You can apply for debt repayment assistance every six months. This assistance is not available for money borrowed through a student line of credit.

Are there any downsides to having a student line of credit?

While having a student line of credit is a great option for those who don’t qualify for government assistance with their schooling, there are a few drawbacks to keep in mind.

One of the main downsides of a student line of credit is the variable interest rate. Most lines of credit have rates that can fluctuate based on the economy, making it harder to predict your monthly payments.

The interest rate you pay will change according to the financial institution’s decisions and the economic situation. Additionally, your rate will depend on whether your line of credit is secured or unsecured and your credit score.

Another significant downside is the potential to overspend. Without careful budgeting, you could end up with a lot of debt. Since the money is easily accessible, it can be very tempting to keep withdrawing more and more money to cover little indulgences here and there.

But little things can quickly add up over time. That’s why, with a student line of credit, it’s important to be disciplined and only borrow what you truly need. Remember, this is borrowed money that you will have to repay in full once you’ve graduated.

What else can you use a student line of credit for?

Most students use a line of credit for school-related expenses like tuition, books, exam fees, and prep materials, but you can also choose to use it for other purposes if needed.

Paying off higher-interest debt

One way you could use your line of credit is to pay off your high-interest credit card debt. Your line of credit probably has a lower interest rate than your credit card, so this way, you’re not losing money on high-interest fees while you pay it back. Just make sure you learn from the experience and avoid racking up a bunch of new debt on your now-paid-off credit card.

Buying a car

Depending on your location and where you work, having a car might be essential while you’re in school. Car loan interest rates can differ significantly based on whether the vehicle is new or used and whether the interest rate is fixed or variable. Using your student line of credit with a lower interest rate to cover the cost could save you money in the long run.

Making a downpayment

If your line of credit limit is much higher than you need for school, you may choose to use part of it to make a downpayment on a home. The interest rate you have on your line of credit may be lower than that of a loan for a downpayment.

When you buy a home in Canada, you need to put down at least 5% for the first $500,000 of the purchase price and 10% for the portion above $500,000, up to $1 million. For homes priced over $1 million, a minimum down payment of 20% is required.

The bottom line

A student line of credit gives you a flexible way to fund your post-secondary education, and it even typically offers a grace period post-graduation before you start repayments. While you’re in school, you only have to worry about the interest payments, and afterward, you only have to pay back what you borrow plus the interest.

As such, a student line of credit can be a great alternative to other higher-interest loan options, like personal loans or credit cards.

And speaking of alternative options, KOHO offers an instant-approval virtual credit card that allows you to earn up to 6% cashback when you shop with your card in-store and online (just make sure to use the link in our mobile app).

Because it’s a prepaid card, there are no high-interest fees, and if you’re looking to build up your credit history while you’re in school, you can also sign up for KOHO’s Credit Building feature. Just make your monthly payments and watch your credit score grow with KOHO’s free credit score!