In theory, student loans and student lines of credit are designed to make post-secondary education more accessible.
In practice, however, they create a debt dependency for individuals who pursue their studies after high school.
Unfortunately, depending on your situation, student debts can become overwhelming and hard to manage.
If you are still considering which loan to take and wondering which are the safest options for your financial situation, we’ve compiled this brief overview explaining paying off student loans vs student line of credit.
Former students who could be facing debts will find out how to tackle paying off your line of credit or student loan debts.
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What are the repayment terms of my student loans?
The most common misconception regarding paying off student loans vs line of credit is the date of repayment.
A student loan is a federal or provincial government guarantee loan for students only.
To obtain it, students need to apply to the relevant federal authorities.
Student loans are free of interest rates for the duration of your studies.
You don’t need to repay them while you are still studying – but you can if you choose to.
On the other hand, a student credit line is a private loan provided by a bank or any other financial institution.
As such, the repayment agreement is similar to any other loan.
The interest rate applies as soon as you take the loan.
Additionally, there is no delay in the repayment timeframe.
If you take a student line of credit, you will have to start making payments towards the balance as soon as you take the loan.
Students begin repaying their lines of credit while they are still studying.
Student loans vs student lines of credit: What are they?
As student loans and a line of credit are different financial programs, you need to know which ones you’ve taken to manage repayment.
Typically, your agreement should highlight the differences and the provenance of your student money.
For clarity, here is the list of the government guaranteed student loan programs available in Canada:
- Alberta Student Aid;
- British Columbia Student Aid;
- Manitoba Student Aid;
- New Brunswick Student Financial Services;
- Newfoundland and Labrador Student Financial Services;
- Northwest Territories Student Financial Assistance;
- Nova Scotia Student Assistance;
- Nunavut Student Funding;
- Ontario Student Assistance Program (OSAP);
- Prince Edward Island Student Financial Services;
- Quebec Student Financial Aid;
- Saskatchewan Student Loans;
- Yukon Student Financial Assistance.
These programs provide student loans.
As you apply for a student loan, you can also be considered for a student grant.
Be aware that a federal student grant does not need to be paid off.
You can receive more than one grant at the same time.
Most students are automatically considered for a Canada Student Grant when they apply for a loan – except for students with permanent disabilities who may need to apply separately depending on their province or territory.
On the other hand, private student loans such as a line of credit, a term loan, or a student credit card, are not government guaranteed programs.
Private loans are offered by banks and financial companies to support post-secondary education expenses.
In principle, they work exactly like a loan: You pay for what you borrow.
The interest rate on student lines of credit can be lower than what you get from a government student loan.
However, the interest rate applies as soon as you borrow money.
Banks don’t like taking risks, which is why they offer different loan options depending on the students’ job prospects.
Some banks also require additional security, such as using home equity as collateral or requesting that a parent acts as a cosigner.
When do you start paying off student loans vs student line of credit?
Ideally, you should start paying off all your student loans, including government loans, as soon as possible.
In practice, however, things can be different.
When you can’t afford to pay off all your loans while studying, you need to understand the essential repayment difference with government guaranteed student loans vs line of credit.
Your student loan does not need to be repaid while you are studying.
However, each student loan has a specific lifetime during which no interest is charged:
- Students in full-time studies will typically receive 340 weeks;
- Doctoral studies students can get up to 400 weeks;
- Students with permanent disabilities receive up to 520 weeks.
Once the student loans have reached their lifetime limit, the interest accumulates.
However, most provincial loans have an interest-free grace period of 6 months after the end of your studies.
The grace period is designed to enable students to settle into professional life.
Financially, it can be a good idea to ask if you’re eligible for the grace period as it can allow you to cover relocation, accommodation, and work-related costs more easily.
Not all student loans have an automatically included 6-month grace period, so it’s best to review your agreement and get in touch with the relevant authorities.
The grace period doesn’t mean you can’t repay your loan sooner.
With private loans, unfortunately, you can’t escape interest fees.
The sooner you pay off the debt, the cheaper it will be.
If you take a student line of credit, you will need to make monthly payments while you are studying.
The same principle applies to student credit cards.
However, you may be able to defer payment of the money you’ve borrowed until 12 months after your graduation date if you opt for a term loan.
However, banks will still charge interest for everything you’ve borrowed from day one.
I’ve got multiple student loans. Which one do I pay off first?
If you’ve taken more than one loan, you need to be strategic about paying off student loans vs student line of credit.
Ideally, you should compare interest rates and prioritize loans with the highest interest rate.
Catalogue your student loans and other financial assistance to include the following elements:
- The balance vs interest rate ratio. You want to focus your attention on high-interest plans. Student credit cards often sit in this category and need to be tackled in priority;
- Prioritize term loan repayment or any loan with a cosigner so that you don’t put them at risk;
- Keep up with the minimum payments on your student line of credit until you can afford to dedicate more to the balance repayment;
- Review your repayment plan for your student loans as you can apply for new terms with the National Student Loan Service Centre.
Creating a monthly budget can help define how much you can afford to repay towards eliminating your student debts each month.
Using your priority list, you can design payment management plans that are suitable for your finances.
Remember that you can also make a lump sum payment at any time, which is applied to the interest you owe first before going to the principal – aka the money you’ve borrowed.
I can’t afford to repay my student loans
Despite your best budgeting efforts, you can manage to make the necessary repayment towards your student debts.
You can have different options to ease repayment pressure.
The National Student Loan Service Centre offers a variety of repayment options.
You can apply to a repayment assistance plan or a revision of your payment terms.
Former students with permanent disabilities can also apply for a customized repayment assistance plan or additional repayment benefits.
Former students can also apply for a student debt consolidation loan, which enables them to repay their debt in full.
However, it doesn’t eliminate the debt, as you will need to pay off the consolidation loan.
In other words, it transfers the debt problem from one loan to another.
Additionally, consolidation loans have a high interest rate, which can be superior to government programs, which can make it challenging to repay.
It’s also worth noting that converting your student loans to a private debt consolidation loan eliminates any tax benefits you would have received from student debts.
When you apply for a consolidation loan, you are no longer eligible for the NSLSC repayment assistance plans.
Managing student loan and line of credit debts
Both private and government loan debts affect your credit rating.
Creditors are likely to get in touch with collection companies to request payments and garnish your wages.
Did you know that federal and provincial governments don’t need to go to court to garnish your wages?
Additionally, term loans can put your cosigner at risk. How can you settle student loan debts?
Private loan debts can be managed with the help of a credit counselling debt management plan.
You can also turn to a licensed insolvency trustee to file a debt settlement program such as personal bankruptcy or a consumer proposal.
Unfortunately, if you choose to declare bankruptcy to settle a debt with a cosigner, the process doesn’t eliminate the financial obligation of your cosigner.
For government loans, however, a credit counselling debt management plan is not a suitable solution.
A trustee can help you obtain debt forgiveness through a personal bankruptcy or a consumer proposal for your student loans if you left university at least 7 years ago.
Put an end to your student loan debts.
Figure out with a trustee how to pay student loans off or what to do if you can’t pay off.