A professional student line of credit is necessary for many medical students and residents to fund their medical training. While most use a line of credit for school-related expenses like tuition, books, exam fees and exam prep materials, some may use it for other purposes.
In Canada, the five big banks currently offer student lines of credit with an upper limit of $325,000 to $350,000. The biggest advantage of a line of credit compared with a loan is that you’re charged interest only on the amount you actually use, not on your borrowing limit. You also benefit from a lower interest rate (such as the lender’s prime rate,1 and some lenders even offer prime minus 0.25% on a professional student line of credit).
If you don’t need the full amount for schooling, should you take advantage of that “cheap money”?
Here’s a look at what some medical students/residents use their line of credit for, and what to consider if you decide to do the same. Be sure you have a smart strategy for managing the debt you’re taking on. Talk to an MD Advisor* first — they can help you prioritize and achieve your financial goals.
Making a down payment on a home
When you buy a home, you must pay down at least 5% for the first $500,000 of the purchase price and 10% for the portion of the price above $500,000 (for properties up to $1 million). For homes above $1 million, you need a minimum down payment of 20%. If your down payment is less than 20%, you’ll need to get mortgage default insurance.
Effective July 1, 2020, the Canada Mortgage and Housing Corporation no longer allowed homebuyers to use borrowed funds (such as an unsecured line of credit) for part of their down payment if they need mortgage default insurance. The two private mortgage default insurance companies did not follow suit. If you use your student line of credit for part of your down payment, you’ll need to proceed with caution to make sure you don’t over-borrow.
The bottom line: While it may be possible to use a portion of your professional student line of credit, there are other options. Consider using savings first, from either your bank account or your tax-free savings account.
If you have money saved in an RRSP, the federal government’s Home Buyer’s Plan allows first-time homebuyers to borrow up to $35,000 if they qualify. But you must pay back the amount you withdraw within 15 years, with the first payment due two years after your withdrawal (on top of the mortgage payments you’ll be making).
Another option? Talk to parents or family members about their willingness to gift funds to you for a down payment.
Buying a car or paying off a car loan
Depending on where you live and work, a car may be a necessity. The interest rate for a car loan can range widely, depending on whether a car is new or used and whether the interest rate is fixed or variable, so carrying the cost through a lower-interest rate vehicle, like a professional student line of credit, can really pay off. (Note that some car loans are available from dealers at 0% interest. If that’s the case, borrow from the dealer.)
It’s important to know that although principal payments on your line of credit are not required while you’re in medical school, residency or doing fellowship, interest charges on anything you’ve borrowed will continue to accrue. In short, you could be paying for that car for years to come — long after it has depreciated in value.
The bottom line: From a financial standpoint, you should always borrow from the lender that offers the lowest interest rate. But you can have only so much debt. So if you borrow for a vehicle, it may impact your ability to increase your professional student line of credit in the future if that’s part of your plan. You’ll also have more than one payment to make once you complete your residency/fellowship: car payments (principal only if you get a 0% loan) and line of credit payments (interest and principal once you complete your training).
Paying off higher-interest debt
If you’re carrying high-interest debt on credit cards or owe money to the Canada Revenue Agency, for example, interest can add up quickly, particularly if you’re making only the minimum required monthly payments. Consider paying off that high-interest debt with your low-interest line of credit. Here’s how that might look.
Let’s say you owe a total of $20,000 on multiple credit cards, all with an annual interest rate of 20%. You’ll pay $4,000 in interest over the course of a year. But by consolidating your high-interest credit card debt into a professional student line of credit with an interest rate of 2.2% (calculated at prime minus 0.25% and based on the current rate), you’ll owe $440 in annual interest — a significant savings.
The bottom line: The general guideline when it comes to debt management is to repay the highest rate debt first. If you have room on your line of credit, you can use it to do so.
* 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.