Student lines of credit a good tool for funding education, if used responsibly
The line of credit was only supposed to be for a cheap set of wheels to get Krystal Yee to her classes and part-time jobs. But soon after she purchased her $1,600 used car, Yee maxed out the entire $7,000 the bank had made available to her.
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Lines of credit can be a usefull, but dangerous, tool for post-secondary students.
“I tried to think ‘what did I buy that was significant?’ And besides my car, I was horrified to realize I had no idea where the money went. It just was gone,” said Yee, now 31.
Banks offer lines of credit for students who may not qualify for government loans, or who have costs above and beyond what government loans cover.
Yee, who blogs about personal finance at Give Me Back My Five Bucks, said despite her experience, she believes a student line of credit can be a useful tool — if used responsibly.
“If I was talking to someone about a line of credit right now, I would say to treat credit with respect. It’s something that I didn’t do. I was really abusive to my line of credit and it really hurt me in the end,” said Yee, who lives in Vancouver.
When Yee graduated, she owed $14,000 in government student loans on top of her line of credit and credit card. She got out of the financial hole, but it was a painful journey.
More often than not, a parent will have to co-sign for a student line of credit, whereas for government loans, it’s on the student’s shoulders.
Yee said she couldn’t have gotten her line of credit without her mom’s signature. She says her mom had good intentions, but a frank talk ahead of time about financial responsibility would have avoided a lot of hardship.
“She probably thought I was responsible enough to know all that stuff, but unfortunately I wasn’t,” said Yee.
Janet Boyle, vice-president of unsecured lending at Scotiabank, encourages students and their parents to have a face-to-face chat with a financial adviser from the outset — and to do the same after graduation.
“We want them to come in and talk to us, to just be mindful of not getting in over their head and being very focused and disciplined about what those next stages in their life look like,” she said.
With a Scotiabank loan, students pay only the interest when they’re in school and are given a year-long grace period after graduation before they have to start paying back the principal. Payments can be amortized over up to 15 years.
Michelle MacKenzie, a financial aid officer at the University of Calgary, said support is also available when it comes to government loans. Her office facilitates those loans for students and holds budgeting workshops. The federal government’s CanLearn website is also a great resource, she said.
Government loans are interest free while a student is in school full-time and “there’s lots of flexibility and options for repaying those loans that students might not be aware of.”
For instance, during times of financial hardship, payments can be reduced or stopped temporarily.
A lot of “free money” can also be found in the form of bursaries, scholarships and grants, she added.
It used to be common for students to be turned down for government loans because their parents’ income was too high. However, in recent years, more and more students are eligible for both provincial and federal loans, reducing the need for other financing, she said.
When it comes to lines of credit, parents and students alike need to go into it with their eyes open, said Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada.
“The parents can be under water if they’re responsible for paying back the loan and it’s going to affect their credit if they have trouble paying back the loan,” he said. “The last thing you want to utilize in the student line of credit is to fund some spring break trip to Mexico.”
For lines of credit, it pays to shop around, he added.
“Remember, banks are competing for your business. They recognize that this is a person who’s borrowing money for a good reason: to continue their education, to become more employable and at the same time have a better-paying job. So these are the potential customers down the road that could have other borrowing needs.”