Ms. Money goes to college... and into debt
Kelsey Adler is a student in the Donald School of Business’s diploma in financial services program, and wrote this article as part of the school’s personal credit management class. She has a background in customer service and sales.
Whether your parents earn too much for you to qualify for student aid or loans, or you just need a little extra financial room to work less and keep your grades up, a student line of credit can be a great way to help you make your future dreams come true. Moreover, if used properly, it can help you establish a positive credit history, which will only help you in the long run.
Student lines of credit are generally unsecured, which means you do not have to put up security or collateral to help the bank repay the loan in the event you cannot make your payments.
However, this usually means your parents, or another close relative, must co-sign the loan.
A co-signer must be someone you know who has good credit history.
The co-signer is responsible for repaying the loan in the event you cannot. If you cannot repay the loan, not only is your credit history negatively affected, but your co-signer’s credit score will be significantly lowered as well.
One cost-effective way to protect you and your co-signer in the event of death or disability is to ensure that the line of credit is insured with credit insurance. After all, you are asking someone else to help you get an education and help you to begin building a credit history.
Life insurance can ensure that the balance is paid in full in the event of the death of the student borrower or co-signer. Disability insurance can provide coverage for payments on the line of credit in the event that the borrower or the co-signer become disabled.
Most banks and credit unions offer student lines of credit with limits of between $5,000 and $10,000 each year.
You are responsible for making monthly interest payments while you are in school, which means that the principal of the loan will not be reduced until you start working full time or have been out of school for a year.
For example, if you owed $5,000 on a student line of credit and your interest rate was prime plus one per cent, which is generally what is charged on student lines of credit, your monthly payment could be as low as $20.
After leaving school, you will need to negotiate repayment of the loan. For example, if you wanted to repay a $20,000 student loan over five years, assuming four per cent interest, your monthly payment would be $368. Your total interest cost for the four years of school, plus five years of repayment, would be just under $4,200.
A great strategy in repaying lines of credit or other debts is to set up automatic withdrawals from your chequing account. This will ensure that, as your professional career gets busier, you will not forget to make your monthly payments.
All things considered, lines of credit are relatively cost-effective sources of funding for your education, and if used properly, a great way to establish a positive credit history. That can only help you create your financial destiny.
Easy Money is usually written by Patrick O’Meara, an instructor at Red Deer College’s Donald School of Business (Patrick.O’Meara@rdc.ab.ca). This week’s column was written by one of his students, Kelsey Adler.