Student Line of Credit — and Other Loans Students Should Avoid

 April 8, 2021
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When you borrow a student loan, you are responsible for repaying the balance, sooner or later, and tacked-on interest.

A student line of credit, however, allows you to qualify for a certain amount of funding for more variable school expenses such as living costs, textbooks or school supplies. Plus, you’re not obligated to use — and pay interest — on 100% of the available funds. You could be approved for $15,000, for example, but only decide you need to borrow $5,000 after securing other financial aid.

With that, a student line of credit might sound like the way to go, but unfortunately, it’s one of a handful of college financing options that hide high interest rates, potential fees and limited protections. Let’s examine these suspect ways to cover your short-term cash needs, and better options to consider instead.

1. Student line of credit
2. Payday loans
3. Auto title loans
4. Cash advances

1. Student line of credit

Given its built-in flexibility, this financing option might sound great, but there are some serious cons of a student line of credit.

  • You might be required to make in-school payments on the borrowed amount.
  • You’ll likely be subject to variable interest rates, which start lower but unlike fixed rates, can — and often do — rise over time, adding to the cost of repayment.
  • Your repayment term on a student line of credit could stretch longer than typical installment loans, allowing more interest to accrue over time.
  • Without federal student loan-like repayment protections, you could be tempted to purchase insurance on your student line of credit, further adding to the cost.
  • Once you leave school, your student line of credit could be converted to a student loan, albeit at a higher interest rate than most student loans carry.

Yes, unfortunately, rates on student lines of credit pale in comparison to rates on student loans. You can certainly expect to face a double-digit APRs even if you (or your cosigner) has quality credit. Even worse, if you miss a payment on a student line of credit, your APR could jump by 10 or more percentage points.

Watch out for a student line of credit by other names
These loans are also marketed as “family line of credit” and “student tuition line,” and although they’re more commonplace in Canada than the U.S., there are domestic lenders with this suspect financing option.

Better options: Federal student loans don’t require a credit check, include vast repayment safeguards and often have lower interest rates. For loans disbursed before July 1, 2021, federal loan interest rates range from 2.75% to 5.30%. If your federal loans aren’t enough, several private student loan companies offer decent terms. If you go the private student loan route, be sure to compare several lenders before applying. Also, note that you might need a cosigner to get approved.

2. Payday loan

Payday loans are ridiculously easy to get. They don’t require a credit check, and you can typically get cash within minutes.

The problem? You usually have only a couple of weeks to repay the loan, and the typical APR is almost 400.00%, according to the Consumer Financial Protection Bureau (CFPB). If you can’t pay it back and have to take out a new payday loan to pay off the first, you could end up stuck in a vicious cycle of predatory debt.

Better option: A payday alternative loan (PAL). Some credit unions offer PALs to their members to help lower the cost of a short-term loan. Your loan term can range from one to six months, and the maximum APR is 28.00%.

The main drawback is you may have to be a member of the credit union for a certain amount of time before you can apply. So, you might not be able to join a credit union today and get approved for a PAL immediately. Also, not all credit unions offer PALs, so if you’re a member of a credit union, check its loan offerings.

3. Auto title loan

If you have a car, you might think an auto title loan is worth considering. After all, the loan is secured by your car’s title, so you should be able to expect lower interest rates, right?

The reality is these short-term loans also have three-digit APRs, and you typically have between 15 and 30 days to repay the loan. You could even say they’re worse than payday loans because you can lose your car if you don’t pay back the loan on time.

Better option: A short-term campus loan. Some colleges offer emergency student loans to help cover tuition. California Polytechnic State University, for example, doles out $300-to-$500 loans with just a 1% service fee and expects repayment to not exceed 90 days.

4. Cash advance

If you have a credit card, it might be tempting to head to the ATM and withdraw some cash. This type of loan isn’t as costly as a payday loan or an auto title loan, but it’s not ideal for two reasons:

  1. Credit cards charge a fee, typically 5% of the advance amount. So, if you withdraw $500, you’ll have to pay $25 upfront.
  2. There’s no grace period with cash advances, so interest starts accruing immediately. With normal credit card purchases, interest doesn’t hit until after your due date. Also, the APR for cash advances is usually higher than the APR for regular purchases.

As a result, a cash advance is rarely a good idea.

Better option: A 0% APR promotion. Some credit cards offer a 0% APR promotion on new purchases for a period. As a student, you likely won’t get approved for many of these cards. But student credit cards offered by Bank of America has an introductory APR of on purchases. (A APR applies, thereafter.)

Just be sure to pay them off in time. As of April 2021, your APR could be as high as 21.99% after the promotion ends.

Andrew Pentis contributed to this report.

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