Student loan or line of credit: How to know which is best for you
Student loan or line of credit? They might sound similar, but they’re quite different. Let’s walk through how they compare, and how to know which is right for you and your education.
Student loan or line of credit? They might sound similar, but they’re quite different. Let’s walk through how they compare, and how to know which is right for you and your education.
If you’re gearing up to get into higher education, you’ll often want to consider borrowing money to help you shoulder the cost of tuition, books, and life costs during the time you intend to be in school. That means deciding if a student loan or line of credit is best for you.
Most people will have heard of student loans and will know exactly what those words entail. Like any loan, this would be an amount that students can borrow, if approved, to help fund their time in school or perhaps even in a training program.
But many people likely have not heard of a student line of credit, which can serve the same purpose (it’s also different from credit cards, if you were wondering).
So, what’s the difference between these two financial products? And how can you tell which one is best suited to your needs and budget? Who can apply, and when do you have to pay it back?
Credit union experts have the answers to these questions and more, and their notes can help you get ready for this assignment. Buckle in and get ready to learn which is best for you.
A student loan is funding provided by a federal or provincial student loan provider (provincial and/or federal) to students pursuing post-secondary education and who are in financial need.
Student loans are provided while the student is attending school and must be paid back with interest after the student graduates. Financial need is the main factor when determining loan amounts.
A student line of credit is a loan provided by a financial institution to students pursuing post-secondary education and are in financial need.
HONEST TIP: Got more questions about borrowing?
We’ve got you covered there, with our guide to borrowing. It covers everything from borrowing as a student, the different ways you can borrow money, and how to balance what you need vs. want.
We know financial terms can often sound confusing, so we’ve broken down these and more in our handy financial terms glossary.
While in school, students are responsible for making interest-only payments and the line of credit must be paid back with interest after the student graduates. The parent(s) or guardian(s)' income is the major consideration in determining loan amounts.
The major differentiators are how the qualification process works, how interest is paid, and the fact that you have to pay the money back only a few months after you graduate.
There are specific factors that determine whether you qualify for a loan, and how much money you are approved to borrow.
When it comes to a government student loan, prime candidates are students whose parents have lower-than-average income, meaning that the limit is determined based on the students’ financial need. The higher your parents’ income, the less you will be approved for.
More often than not, we see students who use a student line of credit as a secondary form of student-borrowing or emergency fund because their parents earn too much money, and they’re unable to qualify for the maximum student loan amount.
Wondering if you need additional funds as a student? Consult your budget and see how your monthly expenses add up.
Interest is more than that feeling you get when your new classmates ask you to go to a theme night on campus.
On a student loan, you don’t have to pay interest until you receive your degree or diploma. With a student line of credit, interest is immediately applied and the student (or co-signer) is required to make (fairly small) monthly interest payments while attending school.
Now for the part that makes it real: paying it back. Both student loans and student lines of credit have a grace period for repayment. With a bank loan, students are required to make the minimum payment after a 6–12-month grace period and have a requirement to have it paid off within a certain time frame, meaning that a student line of credit can offer a little less flexibility.
Telling the difference between a student loan and a student line of credit is no easy task. So don’t worry—we’re only just getting started on breaking it down.
Let’s dig a bit deeper by comparing six ways they are different: payments, signing, interest, amounts, tax, and what happens once you graduate. In the below scenarios, we will refer to you, the reader, as you, the student, to help picture yourself borrowing via either a student loan or line of credit.
Student loan: The government loan requires no payments while you are in school. You may also qualify for delayed repayment, depending on your financial situation.
Student line of credit: It’s a little more flexible. You can borrow only what you need and make repayments in any amount of time.
Student loan: You’ll need to enter your parents' information to fill out your student loan application.
Student line of credit: If you don’t qualify on your own, you’ll need a co-signer (usually a parent or guardian) who would then become responsible for the line of credit’s outstanding balance if you can no longer make the payments.
Student loan: You can apply for debt repayment assistance each year. And if you qualify, the government pays the interest portion of your student loan or defers your payments.
Student line of credit: You are expected to pay back the interest only on a monthly basis while you remain enrolled in school. Once you have graduated, or have left school, you are entitled to a 6–12-month grace period where you continue to only pay the interest.
Both: Always read the fine print and make sure you understand the repayment terms and expectations you are signing on for.
Student loan: Repayment assistance is based on income level and must be applied for each year.
Student line of credit: The amount you receive depends on how much money you apply for.
Student loan: Interest paid on a government loan generates an income tax credit.
Student line of credit: Interest is paid on a student line of credit while you have it and does not generate a taxable credit.
Student loan: You have a six-month grace period to begin paying back your student loans after graduation or after you’ve left school. Once this grace period begins, interest will start accumulating on your remaining balance.
Student line of credit: You begin paying back your student line of credit immediately, starting with only the interest rates and then moving toward a larger monthly payment.
Are you now feeling a bit clearer on how student loans and student lines of credit compare? Or will you want a bit more time to study up? Either way, it’s a great idea to connect with a credit union expert to continue learning more.
Credit union experts would love to help you find the right loan to help fund your education. They’ve been there, too, and they’re here to help. The right loan will not just reduce stress but will help you focus on the things that matter: your education and all the exciting things it will lead you to.
Credit union experts are here to support your financial journey, whether you're just starting out or well on your way. Take the first step today.
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