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How Do Student Loans Affect Your Credit?

How Do Student Loans Affect Your Credit?

Student loans have become a part of the educational process for many students, but how will this debt affect your future? It’s easy to take out a student loan and forget about it while you’re in school, but with the class of 2015 having averaged more than $35,000 in debt per student, it’s time to consider what the cost of that debt truly is, and what to do about it. To understand the full impact of your student loans on your financial situation and future, you need to know how it affects your credit.

How Student Loans can Help You

There are some benefits of having a student loan on your credit report.

First of all, it is considered installment debt, which is generally considered “good” debt because it has value attached to it. Having an education usually means higher income, so this debt is considered an asset, like a mortgage. Additionally, if you have no other debt, your student loan will allow you to establish a good credit history which is very important to your borrowing ability. Your history of making your payments on time will improve your score over time. Student loans are also not weighed heavily when your credit score is calculated, so don’t worry too much about your student loan if you’ve been making your payments on time.

The Downfalls of Student Loans

When it comes to student loans, debt is still debt. And when you apply for more loans, like a car or house loan, your debt-to-income ratio is still a highly-considered factor. So if your student loan is astronomical and your income isn’t what you imagined it would be a few years after graduation, you may have a hard time getting approved for a loan until you’ve paid down your student debt.

Another huge problem with student loans is the misconception that they are easily forgiven. But even if the worst case scenario happens, bankruptcy, your student loan STILL isn’t erased. Just like any other loan, if you hit hard times and miss a payment, it will be reported and go on your credit report. If you default on the loan or are delinquent, that will stay on your credit report for 7 years, and can ding your credit score by 100 points or more.  

Additionally, student loans can be bought and sold like mortgages, even federal loans. This means that multiple companies may take over servicing your loan, and they can all separately report your loan and appear on your credit report separately. This is why regularly reviewing your credit report is very important so that you can catch these mistakes and have them corrected.

How to Navigate Student Loans

The best thing you can do for your future self is to avoid student loans. That may seem impossible, but it’s not. Find jobs that are flexible with your school schedule. Waiting tables or finding night shifts are good ways to earn money through school. Understand that you won’t live your parent’s lifestyle until you’re well into your career, so for your college years live in cheap housing, drive an affordable car or better yet, walk or bike. Do everything you can and work hard to pay for your education yourself, or at least take out the minimum amount of student loans you have to. Yes, it may seem like everyone else is living off of loans, but that just means that you’ll have more financial freedom than everyone else when you graduate, and this can be a huge selling point to your work ethic and responsibility when it’s time to apply for jobs.

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