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Everything you always wanted to know about student lines of credit (but were afraid to ask)

A student line of credit (LOC) is going to be one of your most important financial tools as you make your way through med school and beyond. But many people don’t understand what a student line of credit really is, let alone how to use it effectively. But don’t worry—we’ve answered all the most basic questions (so you don’t have to ask them).

First of all, do I really need a student line of credit?

Yes. Unless you have a bunch of bursaries, parents who are able to fund your education, or a few hundred thousand dollars squirreled away in a mattress somewhere. And even then…yes, you’ll likely need one.

What exactly is a student line of credit, anyways?

Simply put, a  student line of credit is a sum of money that you borrow to cover the costs of medical school—from tuition, to living expenses, to all the other fees that will pop up along the way (and there are some, believe us). You can use it at your discretion.

In that sense, a student line of credit is like a pile of money that you can spend and pay back at your leisure. Easy, right? But that ease can also make it difficult to manage. A line of credit is essential to your financial plan as you move from med school to residency and practice, and you’ll have to tend to it carefully throughout those transitions.

How is it different than a personal loan?

The simplest distinction is that loans are fixed—that means you are given the entire amount all at once, and then you pay it back (along with the interest) on a fixed payment schedule (usually monthly). The interest rate will be fixed or variable and has a term (aka. a deadline by which it needs to be paid off). If you need more money, you can’t simply increase your loan—you’ll have to apply for a new one.

A student line of credit, however, is flexible; the rate is variable, and repayment is based on interest only. The minimum monthly payments (once it is in repayment mode) tend to be lower than a loan. This means you can pay off your line of credit at whatever pace works best for you, and, for every payment you make, that credit becomes available again. You also only pay interest on the amount you use from your student line of credit.

Is there interest?

There sure is. Lines of credit for med students are typically given out at an interest rate of prime minus X% (the prime rate is set by the banks). Prime rates can change, though – they’re not fixed, like most loans – so it’s important to keep a close eye on things.

How do I pay the interest?

There are no interest payments built in, but interest accrues every month, which means that your interest payments will simply be added to the amount owing. This is called capitalized interest. Some lines of credit will charge the interest to a bank account, so you need to really understand the terms you have so you don’t miss a payment and affect your credit rating.

Are all lines of credit the same?

Not exactly. But…the truth is most lines of credit available to medical students, from most financial institutions, have pretty similar features. As you shop around for a line of credit, you may want to focus on the intangibles, like whether you have existing accounts with a financial institution, or whether you get good vibes from the people you’re dealing with.  

Some lines of credit will offer a grace period after you start your practice (see below), and others might limit how you can use them once you’re practicing. It’s important to work with a financial advisor who is familiar with all the different stages of a physician’s career to make sure your bank is giving you the best option.

Pro Tip: medical students are usually a good bet for financial institutions, so if you’re offered a line of credit at an interest rate higher than prime, you should probably keep looking.

Am I going to have the same line of credit for the whole time I’m in medical school?

There are different types of lines of credit – student, personal, professional, etc. – and they all have different conditions, grace periods, and rates. At different points in your career, you’ll be using your line of credit in different ways, and it’s important that the terms and conditions of your financing are in line with them.

A student line of credit should, in general, keep the same terms and conditions throughout your studies. The important thing to know is what happens when you start your practice—as you’ll learn, some lines of credit offer a grace period during which the terms and conditions won’t change. Basically, you keep the same benefits you had as a student. After that, the bank will decide whether it will be converted into a personal loan or a personal line of credit.

How big should my line of credit be?

The truth is, predicting how much money you’ll need over the course of medical school is kind of like trying to predict the weather in four years’ time (sure, it’ll be warmer—but how much warmer?). You might calculate that you need tuition and living costs for four years—but that doesn’t account for all the intangibles that you’re going to face: applications costs, textbooks, licensing fees, conferences, charitable donations, moving costs, travel (both personal and professional). The med student life will throw a lot of curveballs your way—and you’ll have to be ready for them.

To that end, most financial advisors will recommend that you get as much money as you can upfront. The maximum amount available to you will vary between financial institutions, but you’ll want whatever extra space you can get. It’s not about spending it, but about being well-prepared for the unexpected. This is where a line of credit is superior to a loan: you’re not paying interest on the full amount, only on what you’ve spent. 

Having a financial advisor help you determine how much of your expenses (if any) you should be carrying at the end of each school year is an effective method for monitoring and manage your debt.

How should I be using my line of credit?

That’s the big question, isn’t it? And the answer will be different depending on your budget and financial plan (which is why it’s important to work closely with your financial advisor to figure these things out). However, there are some general rules that you should be aware of when it comes to how to use your line of credit.

Years one and two of medical school can pass by in a flash. With the exception of tuition, these are your leanest financial years—your biggest expenses will probably be living and lifestyle costs. It’s important to manage your money well during this phase, because during years three and four, you’re going to need a lot of free space. The CaRMS process can be extremely expensive, and not just because of the numerous application and registration fees—there is often a lot of travel involved, as well as the peripheral costs of trying to look and sound your best (interview training, new clothes, shoes, etc.). When you’re a resident, despite the fact that you’ll be earning a salary, you may still have to rely on your line of credit for expenses like travel, conferences, and exams.

When I start practicing, I’ll finally be done with my line of credit, right?

Nope, not likely. After med school and residency, chances are you’ll be managing a fair amount of debt, and a line of credit will give you the kind of financial flexibility you’ll need to manage your life as a practicing doctor. After residency, it’s important to know if and when your grace period will kick in—and if you even have one. A grace period temporarily suspends your repayments so that you can get yourself established (see above re: the different types of lines of credit). It’s important to know that interest still accrues on your student line of credit even during this grace period. The real benefit of a grace period is that it helps bridge the gap between residency/fellowship and practice. You may have a few months where you’re not getting paid as you wait for your insurance, licensing, etc., to come through.

For physicians who are looking to start a new practice (or even join an existing practice), the financing available through a line of credit is essential for getting yourself set up. At this point, your student line of credit may evolve to become a professional line of credit – or perhaps even a loan – and will have new terms and conditions that you’ll have to be familiar with.  

This all sounds really intimidating—what’s my first step?

Your line of credit is just one part of your financial plan (albeit an important one). To get a big picture view of your finances, and to develop a smart strategy for managing it all, it’s important to connect with an MD advisor —they’ll help you find your credit score, look at your cashflow, explore government loan options and work with you to develop a budget that will ensure your line of credit is a source of strength (and not stress) throughout your career.