Student Lines Of Credit May Ease Overborrowing

If we have long been guilty of over-borrowing student loans for college, perhaps part of the solution is using a different — but similar — private financial product.

Student lines of credit, unlike closed-end loans, allow you to draw school-certified funds as needed for higher education, instead of delivering a lump sum. That might not seem like a big distinction, but the withdrawal process might force you to really consider whether you need the funds before you borrow them.

“One of the things we’ve really started saying a lot to try to help people understand it, it’s ‘borrow what you need when you need it,’” Mike Weber, CU Student Choice chief marketing officer, says. “So, the whole idea of like, don’t come in and borrow $30,000 because you’re like, ‘well, this is my one chance to get a loan, I’m just going to get as much as I can in case I need it.’ We all know what happens then: You end up using money or borrowing money that you didn’t really need. And now you’re paying interest on that. And that’s not a great thing.”

If you’ve never heard of this product — think of it as a personal line of credit, but for higher education — that’s because CU Student Choice’s nearly 250 member credit unions are the lone lenders offering it in the U.S. Since the product’s inception 17 years ago, Weber says, only 150,000 Americans have utilized credit lines for college.

What exactly is a student line of credit?

If maximizing your federal or private loan limits is like filling every square inch of your cafeteria tray, a credit line is more like returning to the buffet line for smaller portions each time you’re hungry.

Say you’re a first-year student, and you qualify for a $75,000 credit line — the maximum amount for many CU Student Choice members. To draw funds, you and your co-borrower would pass an annual credit check, one that Weber says is a soft inquiry, performed each spring, and have the requested amount certified by your school. Your ensuing withdrawals could be smaller, perhaps to replace a broken laptop.

“The other thing that’s interesting about that is you could do 10 requests during a three-year period, for example,” Weber says. “And when you graduate, you just have one loan.”

You might be wondering if a credit line is simply another name for loans with so-called multiyear approval. Similar, but not the same: College Ave, Citizens Bank and other top student loan lenders truncate the underwriting process for returning customers, sure, but still originate a new loan each time. So, to continue Weber’s example, 10 requests from those lenders would mean 10 loans.

The implications of using a student credit line

Like student loans, student lines of credit carry fixed or variable interest rates. However, the convenience of a credit line might come at a cost depending on your rate type and the rate environment:

• Say you opt for a fixed rate during your first year in college, only to witness tumbling rates during your ensuing years in school. Your credit line APR would be locked at the higher rate if you borrowed again.
• Or imagine selecting a variable rate when you step on campus, and rates climb precipitously. You’d be stuck with a rising APR for future withdrawals.

The beauty of a credit line is that if you were to find yourself in either situation, you could simply not, or no longer, draw on the account and instead shop around for lower-rate financing elsewhere.

Besides interest rates, other implications of credit lines can be less mathematical, more dependent on your personal situation or preferences.

“It allows term flexibility that doesn’t necessarily exist for traditional closed-end student loans. It just comes down to what a student and their family, first, who they would like to work with,” says Sara Parrish, President of CampusDoor. “And then it also comes down to just how would you like it all to work? Drawing on an educational line of credit can be quite convenient: You can draw smaller amounts; you tend to have one big batch of underwriting at the beginning and then perhaps just disaster-only underwriting each year.”

Could credit lines be part of the solution to overborrowing?

Congress and the White House undoubtedly hope that newly lowered federal loan limits will do the work of protecting borrowers from themselves. Given the significant changes to federal Direct PLUS Loans, for example, lower limits might stop parents from mortgaging their retirement and grad students from over-borrowing to land in lower-paying fields.

And yes, slowing the federal-loan fire hose could also lead to slower growth in the cost of college.

But credit lines — which, for what it’s worth, are offered widely by banks in Canada — could also change families’ mindset when it comes to paying for school, by adopting something more like a piecemeal approach.

Weber says CU Student Choice’s credit line application process asks students and families to figure out their overall cost of attendance and what they need to borrow in the near term. Those are two different dollar figures.

“They don’t have to request any money,” Weber says. “Like, you can actually just open this, and it can just be sitting there.”

What’s your next step in paying for college?

It may not be borrowing at all. In fact, taking out a student loan or line of credit should be your last step, and ideally one you could skip altogether. Before you resort to borrowing:

Of course, if borrowing is a necessity, keep in mind that the loan-versus-credit line discussion doesn’t have to be an either-or choice. In fact, you might use a credit line as a “backstop,” as Weber calls it, in case you need to access funds beyond your federal or private loans. A credit line could simply be there if you need it, which might make you feel less pressure to take out more in loans initially.