Are you trying to pick the best between a student loan vs line of credit? If YES, here is a detailed comparison between student loans and line of credit.

Obtaining good education can be a very expensive venture. While elementary and high school education may be affordable for many parents, a lot of students usually need external funding in the form of scholarships and student loans to be able to fund their college degrees.

Studies have however shown that it takes an average of 21 years for a student to pay back their loans. You don’t want to spend a good part of your life repaying loans after school; hence, it’s important to learn which type of loan is best for you as a student.

This article compares two common types of loans – student loans and personal line of credit, to help readers choose the best option for them.

What is a Student Loan?

As you must already know, a student loan is an amount given to a student to cover the costs of financing higher education costs. The loans may cover tuition fees and other living expenses, and the beneficiaries are expected to repay the loans with interests after they graduate and hopefully, get a job. Repayments are usually due to start 6-9 months after the student graduates.

There are a lot of private and government-backed loans that students can obtain. As long as you have a valid social security number, are enrolled in an eligible school, maintain a certain GPA, and meet some other specific requirements including proof that your parents do not earn enough to pay your tuition fees individually, you should qualify for a student loan.

What is a Student Line of Credit?

A student line of credit on the other hand, is an approved lump sum awarded to a student to cover costs of education. Although the awarded sum is a lump sum, the student need not withdraw the entire sum; you can just take out whatever you need to cover the costs of your education as at when due.

You will also be expected to pay back the principal sum along with any accumulated interests upon graduation from college.

Student Loan Vs Line of Credit – Which is the Best?

  • Pros of Student Loans

There are a number of advantages that student loans have over student lines of credit. Some of them include:

  • Fixed Interest Rates: You can always predict the interest rates that you will have to pay back when you graduate because the interest rates for government-backed student loans are usually fixed. This helps to protect you in case of inflation.

Student lines of credit on the other hand have flexible interest rates that fluctuate according to the market rates. It may seem cheaper to service a student line of credit now but in the future, the rates may float higher and become ridiculously expensive.

  • No Repayments until You Graduate: Government-backed student loans allow you to defer payments until you graduate because it is unlikely that you’ll be able to afford to pay back a loan or pay interests while you are still in school.

This means that you can focus on your education and forget about your debt until you graduate.
But if you get a student line of credit, you’ll have to pay interests on the balance every month. This means that you still need to get a job, or have someone repay the interests on your behalf while you are still studying.

  • You Get Tax Credit: When you pay interests on government-backed loans, you get tax credits but you don’t get any tax credits on student line of credit.
  • You can Have Your Debt Forgiven: The government sometimes forgives student loan debts, especially after 20 years but with student line of credits, there is no hope for getting debt forgiveness.

Pros of Student Line Of Credit

  • You Get Only What You Need: With student line of credit, it’s up to you to decide how much you need, and limit your withdrawal to just that. This helps you to reduce the debts you have to repay unlike government-backed loans where you get specific sums.
  • You can get a Co-signer: You can get a co-signer, which could be your parent or any other sponsor to co-sign the line of credit, and pay the interests on your behalf until you graduate.
  • No Collateral: unlike other types of personal loans where you have to secure the loan with some type of asset as collateral, there is usually no need for collateral security when applying for a student line of credit.
  • Build Your Credit Score: You can use your student line of credit to build a solid credit score for yourself that will be of great advantage to you when you graduate. As long as you are faithful with your interest rate repayments, your credit score will continue to increase.
  • Flexible Interest Rates: You will only have to pay interest on the amount you actually spend so student line of credit can serve as backup and assurance that you’ll always have access to funds whenever you need it even if you don’t need it at the moment.

When to Get a Student Loan or a Student Line of Credit

It’s best to get a student loan if you don’t want to work while you study or if you don’t have a sponsor who can afford to repay the monthly interest rates on your behalf. You can also get a student loan if your GPA or parents’ income do not qualify you to get a government-backed student loan.

However, if you have a job and just need a little extra funding for living or other expenses, or you don’t want to be saddled with the burden of repaying huge student loans upon graduation, you can opt for a student line of credit.

It is also important to note that some students get both student loans and line of credit when the loan they get is not sufficient to cover all their expenses. You can do this too but with caution because you’ll have to repay every single cent you get with interests at the end of the day.