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Resident physicians: Your top 10 questions about lines of credit answered

A man speaking to a woman at a desk pointing at a laptop.

1. How is a student line of credit different from a student loan?

Lines of credit and student loans each have two parties: a borrower (that’s you) and a lender.

You apply for a line of credit such as a student line of credit from a financial institution, like a bank or credit union. After your application is approved, you can withdraw funds as you need them, up to your approved limit — which is usually much more than a student loan. Some financial institutions will let you withdraw only part of your total limit each year.

Student loans are interest-free until you graduate from medical school, while a student line of credit starts accumulating interest as soon as you withdraw funds.

A student loan is issued by (and repaid to) the federal or provincial government. When you’re a student, you apply each year for new loans, and you are advanced the amount you’re approved for in one lump sum.

2. What’s the benefit of a student line of credit compared with a student loan?

A student line of credit is a lot more flexible than a student loan: you can borrow what you need when you need it, instead of getting the entire loan amount advanced when the loan is approved.

This means that you can manage how much you borrow over time in a much more hands-on way.

3. Are there restrictions on how the funds from a student line of credit are spent?

No — you can spend the funds on anything you choose. That’s why it makes sense to stick to a borrowing plan that’s based on your budget. Otherwise it can be easy to "over-borrow," just because the funds are available — resulting in more debt to pay back later!

4. How is the interest on a student line of credit calculated?

Interest is calculated daily on the amount you’ve borrowed, based on the lending rate set by the issuing financial institution. That rate, in turn, is usually based on the lender’s prime rate (the rate the lender charges its best customers) and expressed as an annual percentage.1

A typical lending rate for a student line of credit would be the lender’s prime rate, while some lenders will offer prime minus 0.25%. The interest is calculated daily and added to the amount you owe on a monthly basis. 

5. Could the interest rate charged on a student line of credit change over time?

Yes! If the lending rate set by the lender goes up or down, the interest calculated and owing on the funds you borrow will change as well.

If the rate goes up, the amount of interest charged on the amount you owe will go up, as it’s calculated using a higher interest rate.

If the rate goes down, the amount of interest calculated on the amount you owe will go down.

6. While I’m a resident, do I have to pay anything toward my student line of credit debt?

The repayment rules during residency will differ from lender to lender. With some lenders, you will need to pay the interest amount on the withdrawn funds on a monthly basis. Other lenders will allow you to “capitalize” the interest payments (add the interest payments to your outstanding balance). Just remember that regardless of the repayment rules, interest is always accumulating on the funds you borrow.

7. What happens if I choose to capitalize the interest payments on my student line of credit? 

If your lender gives you the option of capitalizing interest payments, the accumulated interest is added to the outstanding balance. This is called “capitalization of interest.” The downside is you will be paying interest on the interest you already owe.

8. What happens to my student line of credit when I finish residency?

Different lenders have different rules for repayment once residency is over. Some require that repayments start as soon as residency is over, while others will let you delay the start of repayments for a full year or two.

Your financial situation will change once you finish residency. If you have time before the repayments begin, you can use it to put together a debt repayment plan as part of your overall financial plan, based on your new financial situation.

9. If I finish medical school with a lot of debt, will I still meet my financial goals?

The reality is that most medical students in Canada graduate with some debt. But access to borrowed funds is a big part of what allows students and residents to complete their training, and fulfill their goal of becoming physicians. Borrowing with the support of professional advice and a financial plan that’s tailored to you can help you prioritize and achieve your financial goals during residency and beyond.

10. Where can I learn more?

The student line of credit can be the perfect solution to your borrowing needs through residency and as you transition into practice. Contact an MD Advisor* to learn more. 

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.

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

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.