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Your medical student line of credit: What you need to know

A student using a calculator.

A student line of credit may be one of your most important financial tools as you make your way through medical school and beyond. But you may be wondering how a student line of credit works and how it’s different than a loan.

Here are the answers to all the most basic questions you may have.

What is a student line of credit?

A student line of credit gives you access to funds to help cover the costs of medical school — from tuition to living expenses, to all the other fees and expenses that you will need to pay along the way. You can use it at your discretion, spending the money and paying it back at your leisure.

A line of credit will likely play an essential role in your financial plan as you move from med school to residency and into practice, and you’ll have to manage it carefully throughout those transitions.

How is a personal loan different than a student line of credit?

A loan is fixed — you are given the entire amount all at once, and then you pay it back (along with interest) on a fixed payment schedule (usually monthly). The interest is based on the full amount borrowed, and the interest rate can be either fixed or variable. A loan has a term (a date by which it needs to be paid off). If you need more money, you can’t simply increase your loan — you have to apply for a new one.

A student line of credit is flexible. There’s a maximum amount that you can access, but you borrow only the amount you need and pay interest on that amount. And you can borrow and repay funds as often as you wish. As soon as you repay funds, interest stops accruing on the amount repaid.

How much is interest on a student line of credit?

A typical lending rate is the lender’s prime rate1 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 an eye on things.

How do I pay the interest?

Some banks require that you pay the interest every month, either automatically from your bank account or manually like you do for a bill payment. Other banks let you “capitalize the interest,” meaning you don’t have to make interest payments while you remain in school and for 24 months after your residency program ends (called the “grace period”). Remember, though, that interest continues to accrue on the funds you borrow and that increases the amount you have to pay back later.

Are all lines of credit the same?

The lines of credit available to medical students, from most financial institutions in Canada, offer a limit of around $350,000 to $375,000 and have similar features.

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. 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 get upfront, and 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?

The answer will depend 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 guidelines that you should be aware of when it comes to how to use your line of credit.

The first couple of years of medical school are your leanest, financially — your biggest expenses, besides tuition, will probably be living and lifestyle costs.

When you’re a resident, even though you’ll be earning a salary, you may still have to rely on your line of credit for certain expenses, such as those related to travel, conferences and exams.

What’s my first step?

Your line of credit is an important element, but it’s just one part of your financial plan. 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 look at your cash flow, explore government loan options and develop a budget. Taking those steps will help to ensure your line of credit is a source of strength throughout the physician training stage of your career.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

1 Prime rate means the annual variable interest rate published by the lending financial institution from time to time as the benchmark interest rate for Canadian dollar demand loans. This rate is subject to change without notice.

Banking and credit products and services are offered by The Bank of Nova Scotia “Scotiabank.” Credit and lending products are subject to credit approval by Scotiabank.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.