You’d be hard-pressed to make it through college these days without student loans.
With the cost of a post-secondary education rising each year, most people can’t afford to attend university without the help of student loans. Even a 529 plan and a partial-tuition scholarship might not be enough to avoid student loans.
While there are many advantages to student loans, and you can get special treatment with your student loans, it’s important to understand how a student loan can affect your credit.
Since your credit score is an important part of your financial life, it’s a good idea to consider the impact of your student loans.
Student Loans And Your Credit Score
Student Loans are Debt
Your student loan debt is just that: Debt.
You might have a lower interest rate on the loan, and you might have a grace period, or be able to defer in times of economic hardship, but it’s still debt, and it impacts the way lenders and others see your financial situation.
First of all, the “normal” rules associated with credit apply to student loans as well as to other types of loans. If you are late on your payments with student loans, or default, that will be reflected in your credit score. And, since payment history is so important, it can be a major drag on your credit score if you begin missing payments.
Another consideration is the fact that your student loans can significantly increase your debt to income ratio.
In the past, prior to the Great Recession, student loan debt wasn’t as heavily scrutinized as it now. Tighter lending standards have resulted in more emphasis on student loans as part of your debt to income ratio, especially if you are buying a home.
Realize that your student loan payments can boost your debt payments in calculations, and you might be perceived as not being able to meet new obligations — not to mention the fact that your credit utilization is the second most important factor of your credit score.
Improving Your Credit with Student Loans
Because student loans are considered “regular” debt, it’s possible for them to actually help improve your credit score — as long as you are smart about it.
Student loans can help you establish credit if you don’t have a very lengthy credit history. Additionally, they can add an installment component to your credit history that provide modest improvements to your score.
In order for your student loans to be of use, though, you need to make sure that you make your payments on time and in full.
If you are looking for a way to jump start your credit situation, you will need to start repaying them immediately so that you can show a regular history of payment, rather than waiting until after you have finished your degree.
Also, find out what designation your lender gives for loans in deferment. If the lender will report your loan “paid as agreed,” rather than listing it as in deferment or forbearance, you are less likely to see a drop in your credit score as a result.
However, make sure you aren’t just skipping payments, or you will end up with a much lower credit score.
Private Student Loans
You can get private student loans in addition to federal loans.
Private student loans are offered by banks, and also from P2P lenders. You can find private students that provide you with the ability to fund a gap between what you need, and your federal student loans.
Additionally, it’s possible to find competitive interest rates for many private student loans. However, make sure you closely question your banker, since you want to ensure that you are protected. Many banks don’t offer the same protections that come with federal student loans, so you could end up in other sorts of trouble.
Your private student loans, though, might help you with your credit score. Your payment history is likely to be reported quite quickly, and that can be helpful if you are trying to boost your credit score faster.
Student Loans and Bankruptcy
Understand that, in most cases, your student loans are not discharged in the event of bankruptcy.
So, if you think that the hit your credit will take for a bankruptcy is worth it to erase your student debt, you are out of luck. You will end up with a black mark on your credit, and still owe on your student loans.
The only way to discharge student loan debt in bankruptcy is to file a separate motion with the judge, and prove that repayment represents an undue hardship.
Understand, though, that “undue hardship” usually means that you are kept in some way (such as a physical disability) from working and earning money. If you are capable of work, chances are that your student loans will be excluded from bankruptcy.
It’s true that student loans can be helpful when it comes to getting an education. However, you still have to be careful; you don’t want to get in over your head and be unable to meet your student loan obligations.
It could ruin your credit score.