Deciding between a student loan or a line of credit is one of the most important financial decisions Canadian university and college students need to make.
To put this in perspective, the average debt at graduation was $17,900 for college and $28,000 for a Bachelor’s degree in 2022, according to Statistics Canada. Rising tuition and living costs mean many students will need to borrow more to complete their studies.
The best choice for you needs to account for your financial situation, long-term goals and overall risk tolerance.
1. Student loans
Student loans are made up of a mix of provincial or federal funding and are the most common way of paying for a post-secondary education. Government student loans try to strike a balance between affordability and responsibility through low or fixed interest rates. After all, Canada as a whole benefits from a skilled labour force.
Advantages of student loans
Student loans come with a mix of benefits. These include:
- No need for a cosigner
- No need for a high credit score
- Low or fixed interest rates on non-federal funding (although some provinces have eliminated the interest on provincial student loans, including: BC, Newfoundland & Labrador and New Brunswick)
- Interest-free on the federal portion (as of April 2023)
- Interest free periods during or after your degree
Canadian student loans come in two flavours:
- A fixed rate typically at 2% plus the prime rate
- A variable-rate equal to the prime rate (plus or minus basis points, based on your creditworthiness)
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Pay attention to the prime rate
The prime rate is simply the interest rate of loans set by the Bank of Canada (BoC). Since the prime rate can fluctuate, it’s important to keep informed of changes. Typically, variable rate interest will change when the will BoC updates the target overnight rate. These updates happen eight times a year at prescheduled times. Fixed rate interest rates change on a less-regular basis and usually only when bond yields change.
As of August 2025, Canada’s prime rate sits at 6.95%, following a series of rate hikes in 2022 and 2023 and a pause throughout 2024. Any line of credit or variable-rate loan tied to the prime will reflect these higher borrowing costs, making budgeting especially important.
The Canadian government also offers support for students struggling with repayment during or after their degree. The two big options are the Repayment Assistance Plan (RAP) and Repayment Assistance Plan for Borrowers with Disabilities (RAP-D). As of 2025, you may qualify for the RAP if your income is below $3,153 per month for a single person, with thresholds increasing for larger households. Under RAP, your required payment could be reduced or set to $0 until your income rises. You can apply for RAP as soon as you begin to repay your loans, or at any time after beginning repayment.
Disadvantages of student loans
The two biggest issues with government student loans are limited funding and restrictive use. The amount a student can borrow is capped based on financial need. Likewise, student loans are intended for one specific purpose: your studies. Think tuition fees, textbooks, and some cost-of-living expenses like rent or a dorm. This can lead to a gap between school costs and cost-of-living.
One way to bridge this gap is through a low-interest student credit card. Just be aware that credit cards typically come with higher interest rates — even lower interest credit cards typically start at 8.99% annual percentage rates.
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2. Line of credit
The other option for post-secondary students is a line of credit with an established bank.
Lines of credit allow for significantly more spending flexibility. Unlike a student loan you need a good credit score and a cosignatory, like a parent, to get off the ground.
Advantages of a student line of credit
One of the biggest benefits of a line of credit is the ability to borrow more money than a student loan.
This is perfect for managing high living expenses. It also gives you a buffer for unexpected costs that a student loan wouldn’t cover, like the car you drive to campus breaking down.
Another bonus is the ability to pay only interest back while in school with the total loan repayment, or principal, deferred until after graduation.
This allows you to pay less during the school year while offloading the principal to after graduating and securing a job. Some banks take this even further. For example, the Bank of Montreal’s student line of credit allows for up to two years of interest only payments after graduation.
Many major banks offer student lines of credit from $5,000 to $80,000 depending on your program of study — professional programs like medicine and law qualifying for higher limits, sometimes up to $350,000.
Those with a strong credit history or a well established family credit score may also snag lower interest rates than student loans.
Disadvantages of a student line of credit
Taking out a line of credit needs a higher level of financial literacy and has fewer guardrails than student loans.
A line of credit relies on Canada’s prime interest rate and works in much the same way as a variable interest rate loan. The only difference is that with a line of credit, you are only required to make interest payments on a regular basis. Instead of making a loan payment, that includes interest as well as a portion that repays the debt, you would only have to pay the interest that’s accrued on the debt each month.
For example, a $20,000 student line of credit at 6.95% interest costs about $116 per month in interest only. If you make only interest payments for four years, while in school plus two years after you graduate, you’ll spend nearly $8,400 on interest before even starting to pay down the principal.
What this means is that you can end up paying for the priviledge of borrowing, without repaying your debt. So, if you’re prone to overspending then a line of credit may not be right for you.
One size doesn’t fit all
All in all, student loans are best for most students, provided you qualify. They offer a higher level of security and support with guardrails attached. A line of credit on the other hand, requires more financial discipline and a robust understanding of interest rates and debt management.
Sources
1. Statistics Canada: School board expenditures (x 1,000) (February 5, 2025)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.