If you are thinking about how you will fund your children’s or your own higher education – knowing about some of the options you have is vital to this process. Specifically, looking at Government Student Loans versus a Line of Credit, let’s take a look at some of the pros and cons associated with each type of loan as well as how each may or may not impact your credit rating.
A Government Student Loan versus a Line of Credit (LOC)
Here are some of the main differences between these student loan options that may help you to decided which is the better of the two options for your personal financial situation.
A Government Student Loan
Taking out a loan from the government can have many benefits that are not associated with taking out a line of credit via a financial institution. For example, government loans have a fixed rate, whereas lines of credits will be based on a prime rate that is subject to fluctuation. The interest associated with these loans also make a difference compared to LOC loans. This interest can accumulate in the form of an income tax credit, whereas lines of credit will not.
Additionally, a government student loan often does not need to be paid back while the student is still in school. In fact, the repayment of these loans may also be deferred for a period of up to 30 months, giving the graduate some time to secure employment and access to funds. With that being said, in some instances, you will be required to start paying the interest on the Canadian portion of your loan, once you have graduated. This may be determined by the province in which you attend school. For example, Ontario’s OSAP program does not require interest payments on their portion of the loan.
LOCs, on the other hand may require that students make payments each month, as soon as the loan has been activated. With that being said, some LOC do provide grace periods of up to a year for students – although this is not always the case.
Also associated with loan repayment through the government loans, student loan borrowers can also apply for repayment assistance, in the event they can not pay off the loan for a variety of reasons. In many cases, this means that borrowers do not need to pay off the interest as well as the loan balance itself until they are able to begin paying it back.
How will a Government Student Loan affect your Credit Report?
While both government student loans and lines of credit are typically considered ‘good credit’ as they pertain to your credit report, they still can contribute to your future debt. Government loans that have gone unpaid will show up on your credit report and will remain there for up to 6 years. If for example, you have defaulted on your loan, your debt will be turned over to a collection agency and you will be reported to a credit bureau.
Ultimately, you still want to treat your government student loan the same as any other loan, as lack of repayment or missed payments can also make it difficult to obtain additional credit and other loans down the line.
A Student Line of Credit:
Just like Government Student Loans, there are several advantages to taking out a line of credit that just might make it the better option for you.
Line of Credits (LOCs) are often more flexible in terms of the balance itself. If you don’t require too much, these loans allow you to borrow the amount that you actually need. If you require more of a balance you are likely able to secure more credit, as long as you have an unblemished credit history and/or your co-signer does.
While a line of credit does have interest rates that can move alongside the prime rate, if the interest rates are lower – as they are right now, this can also benefit borrowers who opt for this type of loan. On the downside, if the rate experiences a hike this could make it may be more challenging to pay back your LOC.
Another main benefit of going with a LOC instead of a government loan actually reflects your inability to meed the government school loan requirements. Often times, students will be rejected for a government student loan, if their parent’s have annual income levels deemed too high. With that being said, a student finding themselves in this situation may still require a loan for their education and a LOC may be the way to go. All in all, you won’t be denied a LOC based this income tax bracket.
While in some cases, repayment of a LOC may not be as flexible as government loans, as mentioned they do however offer grace periods where in which interest only needs to be paid back while students are still in school. In fact, many student LOCs have become more and more adaptable to meet the needs of students attending post-secondary education.
Many Canadian Banks now offer student lines of credit that can meet the needs of this demographic. In some cases, they will need to have a co-signer and parents can then step in to assume this role, whenever possible. That being said, your co-signer is taking on the loan and is responsible for these payments as well.
How will a Line of Credit affect your Credit Report?
As previously mentioned, a student line of credit can also be perceived as ‘good credit’ by credit agencies, since it is seen as an investment in your future as opposed to ‘luxury items’ that may be charged to your credit cards. This example of good credit, of course only applies if the loan is paid back on time, each month. Not only will missed payments and an increasing debt level negatively impact your credit report – it also reflects heavily on anyone who acts as your LOC co-signer’s credit.
Overall, in the end it does depend on your personal situation which type of loan may be the better loan route to travel. This is especially true if one loan options is unavailable to you during your time of financial need. Not only do you want to weigh the pros and cons and the reality of which option will best meet your current needs – you should look at the future implications of each of these loans.
Ultimately, knowing the requirements for repayment and the impact that each borrowing alternative will have on your credit report is just as important as your ability to obtain the necessary funds in the first place. Hopefully you can look further into these options and find one that is the best fit for your future financial needs.
