Student Lines of Credit

If you are set up with a bank or credit union under a student plan, then chances are you have received promotional materials for their student line of credit (SLOC). These financial tools (like most others) are useful if used properly and can really get a student behind the debt 8-ball if they are just used to pursue “the moment” with no thought of the future. A SLOC really isn’t that different in most ways from a regular line of credit, and is not in any way a student loan. SLOCs can be used for anything a student wants, and are basically just a running balance with a limit. The limits for most undergraduate student lines of credit are between $5,000 and $10,000. I actually had one for $2,000 when I went to school. The interest rate on SLOCs usually ranges from prime + 1%, to prime +3%, and then floats with the bank’s prime rate. For those of you that have never heard of a floating rate of interest before, this basically means if the Bank of Canada decides that raising interest rates is what is best for Canada, then the interest you pay on your loan (because that is essentially what a LOC or SLOC actually is – a flexible loan) will go up as well. Most institutions will allow students to make interest-only payments on their SLOCs until they graduate.

Student Line of Credit, Student Loans, and Credit Cards

Basically a student line of credit is sort of a midpoint between a student loan and carrying a balance on a credit card. Student loans are really a much better option because they do not accrue interest until a student is done school and even when you have finished your studies, the student loan is more beneficial to have in terms of debt because interest on a student loan is tax deductible, whereas that interest on your SLOC is not. While interest-only payments might sound attractive at first (it usually keeps the monthly costs pretty manageable), this is not a good cycle to get into. Undergraduates carrying thousands of dollars on a SLOC month after month are probably locked into bad spending habits. That being said, SLOCs are a MUCH better option than carrying a balance on a student credit card. Most student credit cards in Canada have an interest rate of between 10% and 20%. Those percentage points are huge when compared to the prime +1% that some of the major banks are offering on student lines of credit right now. Our current prime lending rate is 3%, so at the moment, the effective rate of interest is 4% on a SLOC from RBC for example. I don’t think the Bank of Canada will raise interest rates much, but next year it could conceivably be 4.5% or 5%. That’s still a much better deal than your student credit card. I’m a big fan of using a credit card for the convenience, to track spending, to get rewards, and to build a credit rating, but carrying a balance on it should be a last resort. Using any space left on your SLOC to pay off your balance is probably a good idea – as long as you are not addicted to debt.

SLOCs For Graduate Students and Dentists

It is worth noting that there are much different rules and expectations concerning SLOCs when you are dealing with graduate students, and specifically with students going into professions such as doctors or dentists that have high tuition costs, but also have high expected earnings in the future. Most graduate student limits range in the $40,000-$50,000 student range, with yearly barriers as well. Dental students who have to pay for many of their tools upfront in addition to high tuition rates can usually sign on the dotted line to access up to $200,000 from a LOC. Lawyers, doctors, pharmacists and optometrists also have access to increased loan capability. In addition to having access to higher-paying jobs (and a corresponding higher probability of paying off large loans), these future professionals are also very valuable long-term consumers to a bank. Think about the profits that are waiting to be made from someone that earns a $200,000 yearly salary. Their investment portfolio alone will likely generate massive profits for a bank, as well as the probability of a large mortgage, and other interests. The brand loyalty that can be established early in a professional’s life is worth hundreds of thousands of dollars, and this is important to remember if you are looking to negotiate an interest rate and you are in this enviable career position.

A Good Tool In Your Tool Belt

There is little doubt that many students abuse lines of credit and that access to credit of any kind can negatively impact a large part of the student body. That being said, I think that almost all students should have a SLOC set up for two main reasons. The first reason is just in case of emergencies, and a quick need for a couple of thousand bucks (i.e. you’re a commuter and your engine blows). The usual method of putting this on a credit card could cost you several hundred dollars in interest charges depending on how long it takes to pay it back. The other main reason (and the reason I recommend students get credit cards as well) is that a SLOC is a great method for establishing a solid credit rating. Remember to remind your less responsible friends that a student line of credit isn’t actually code for, “Shots, shots, shots…. EVERYBODY.”