Student Loan or Student Line of Credit?

Getting accepted into the University or College of your choice is one of life’s happiest moments for most students – at least until they realize how much it’s going to cost. Post-secondary education is notoriously expensive, meaning the average student has to take out at least one loan in order to go to school.

We break down two of the most popular options – the government loan and the student line of credit – to help you figure out which one makes the most sense for you.

What are they?

Government Loan

A government loan is funding provided by both the Federal and Provincial governments for students in financial need attending university, college, or some other approved form of post-secondary education. The loan amount granted to the student is determined by their level of financial need (their parents’ income is taken into account) and in some cases, if the level of need is not great enough, the student will not be approved for funding. The Federal government typically covers 60% of the loan each student receives while the province or territory where the student currently resides covers the other 40%.

The loans are provided while the student is enrolled in school but the student does not need to start paying them back until after graduation. The most a student can receive is around $210 dollars a week during the study period. Interest does not accumulate while the student is still at school.

Personal Line of Credit for Students

A student line of credit works just like a standard line of credit in that you apply and are approved for a certain amount of credit. While you’re entitled to use the entire amount you were approved for (if need be), you can also choose to use very little or even none of it (like with a credit card). The student line of credit is intended only to be used for post-secondary tuition and other student expenses (no, sadly this does not include beer money). While in school, you only have to make interest payments, and you won’t have to pay anything if there’s no cost on your balance. Students receive a year long interest only grace period after graduation before they have to start paying back the actual amount owed.

While the student line of credit can be used to directly pay for college or university tuition, it can just as easily serve as supplementary funding for students who haven’t received enough from their government loan to cover all of their expenses.

The Line of Credit is more flexible than a government loan as you can borrow only the amount you need and pay it off as soon as you want (rather than waiting until after you’ve graduated).

Who qualifies?

Government Loan

Canadian citizens, landed immigrants, or protected persons that meet provincial residency requirements and are enrolled in an approved post-secondary institution and program.

Student Line of Credit

Canadian citizens, permanent residents, or landed immigrants who are enrolled in a program that will lead to a diploma, degree or certificate. Some lines of credit specify that the student must be attending a school in Canada or the United States while others do not (so long as the student is pursuing post-secondary school studies that fall within the aforementioned guidelines). There may be further regulations depending on the bank offering the line of credit so research a couple of different ones and compare.

When do I have to start paying it back?

Government Loan

You don’t have to start paying the loan back until 6 months after graduation, but in that period of time interest will start accumulating. Part-time students have interest accrue during their time at school and must be paid while still in school. You can also apply to have your payments delayed (using the repayment assistance plan) for anywhere from another 6 to 30 months. When you do start repaying your loans, you can either choose from a fixed interest rate or a floating rate. Repayment usually takes between 9 and a half and 15 years.

Student Line of Credit

You must make interest-only payments while you’re in school but you don’t actually have to start making payments on the principal amount borrowed until 12 months after you’ve graduated (in which case you have to pay at least 1 per cent a month – with amortizations up to 15 years in most cases). While it might be discouraging to think of making interest payments while still in school, depending on how much (or how little) you’ve borrowed, your payments might be considerably lower than had you taken out a student loan (as you only have to pay interest on what you’ve taken from the line of credit rather than the lump sum you’re eligible for).

Interest rates are typically lower with a line of credit than they would be with a government loan as well (prime + 1 – 1.5%, for example).