For many, government student loans is the first thing that comes to mind when considering the question of how to go about paying for post-secondary education in Canada.
It’s the default answer to the question of how to make something that is (increasingly) unaffordable accessible.
For many, government student loans are what made university or college possible.
But what if you aren’t eligible for a Canada Student Loan?
An educational line of credit is another option to consider when it comes to paying for post-secondary education. But as with a government loan, there are some things you should know before heading to the bank.
What is an educational line of credit?
An educational line of credit — or a student line of credit — is designed to help students pay for post-secondary expenses.
A line of credit lets you borrow to a pre-set limit. In other words, you can spend money, pay it back and then spend it again up to your limit. As is the case with all borrowed money, you are responsible to pay back what you borrow.
Unlike Canada Student Loans, which is a government-funded program, educational lines of credit are obtained from financial institutions, like banks. And as it the case with many financial products, details vary from institution to institution. Please note: depending on your credit history, you may require a co-signer for an educational line of credit. This person will be responsible for the debt if you can’t pay it back.
My educational line of credit experience
I took out a $10K line of credit during my first year of university.
This money was used primarily to cover the cost of a year in residence. My scholarship paid for my tuition, but the school I attended was in another province. In fact, the first time I set foot on the campus was the day I moved in!
During my time in university, I approached my credit line with caution. I used it sparingly, paid the interest every month and used my earnings in the summer to pay it down. In second year, I moved into a house with roommates. That, in combination with working and living frugally, helped me pay back the loan before graduation in 2011.
Four things you need to know about your educational line of credit
Thinking about using an educational line of credit to pay for post-secondary education? Here are some things I think you should know.
Your rights as a borrower
Before you sign on the dotted line, it’s important for you to know your rights as a borrower. When you get an educational line of credit from a bank (or any federally regulated financial institution), they are required to provide you with key details.
The Government of Canada has a detailed list here about what information you should expect to receive re: your loan. Examples of what you should expect to be provided with include: the credit limit, interest rate, information on the grace period and details about fees.
Your interest rate
One of the attractive things about educational lines of credit is often the interest rate.
Rates vary between institutions, but they are often lower than the rate on government student loans.* When I took out my line of credit, the interest rate was prime plus one.
One thing to be aware of is that with an educational line of credit, you pay interest on whatever you borrow right away– even while you’re in school.
It is also worth noting that it is possible for your interest rate to change once you enter repayment. If you are thinking of using an educational line of credit, make sure you understand the terms and conditions set out by your financial institution.
*This will likely be a moot point soon. The Government Canada intends to reduce the interest rates on federal student loans in November 2019.
Your repayment terms
As mentioned, with an educational line of credit, you pay the interest while you’re studying.
Details on the post-graduation repayment process vary. Some financial institutions give you a grace period where you can continue making interest only payments. After that period is finished, you must start paying on the principal. Again, consult your financial institution for terms and conditions.
Had I not paid mine off before graduation, my grace period would have lasted for one year. When that time came, the loan would have stop revolving — I would not longer be able to borrow against the limit — and I would have paid with interest until the balance was paid in full.
That’s another thing worth noting: you can pay back your educational line of credit even when you’re in school. Doing this made it possible for me to finish my undergrad without any debt.
Your plan for paying it back
Or, maybe more specifically, what you’ll do if you can’t pay it back. If you’re thinking of using an educational line of credit, it’s a good idea to think about how you will go about paying it back.
One downside about educational lines of credit is tou are not eligible for programs like Repayment Assistance that help you if you are struggling to pay back your debt.
Some non-repayable grants are only available to those with government student loans. In other words, you could be leaving money on the table. Its also worth noting interest paid on an educational line of credit can’t be claimed on taxes.
Another thing to remember is if you have a co-signer, they become responsible for your debt if you stop paying it back.
So what are your options if you are struggling to pay back your educational line of credit? This depends on where it came from. As such, it’s a good idea to carefully consult the terms and conditions before taking out a loan. If you find yourself struggling, talk to a financial advisor.
Should you use an educational line of credit to pay for post-secondary education?
To echo the point I made in my post about student loans…it depends.
In my case, I only needed a small loan for one year of residence and books. I went into university intending to hold a part-time job during my studies, so I was not worried about running out of funds. Additionally, because the loan was revolving while I was in school, I was able to work in the summer to pay back some of the money then reuse that money in the fall as needed.
That said, I don’t know if an educational line of credit is the best option if you’re going to use it to pay for everything. This is primarily because of how the interest works — not sure if it’s the same for all banks, but unlike student loans, I was responsible for making interest payments every month, even while I was in school. My loan was less than $10K and at a rate of prime plus one, I was paying about $70 a month in interest. If I was financing my entire education through a credit line, that payment would be much higher.
Also, as noted, the interest on a student line of credit can’t be claimed on your taxes.
Final Thoughts
Depending on your needs, an educational line of credit might be a good option for you — or it might not.
If this is something you’re considering, make sure you understand your rights as a borrower, details like the interest rate and repayment terms, and a plan for how you’ll repay the loan when the time comes.
Did you go to college or university? How did you pay for your post-secondary education?
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