Student Loans and Credit Scores: Three Things to Consider

Education is a necessity in today’s world. College graduates face a marketplace of competitive positions and higher standards. Even as the job market changes, university costs are skyrocketing at an average annual increase of six percent. Those without a college fund understand the roadblocks of tuition, room and board, book fees, etc. When money is tight, student loans offer thousands of people a chance to earn advanced degrees each year. While acquiring student loans may seem like the perfect solution, review the following tips before jumping into a life of student debt. Loans could affect more than your job prospects.

    1. Remember the law of cause and effect. The average American student walks away from college with some form of educational debt. Depending on your field and earning potential, this burden may have a negative effect on your credit score. Even if you pay your loans on time each month, total debt is a defining factor of credit scoring. For example, Steve has over $80,000 in private loan debt, forcing him to pay $575.00 a month. Although Steve landed a steady job right after graduation, the heavy student loan — when paired with other “new grad” acquisitions like a new cars and homes — may cause him to have overreached financially, and this may ultimately cause his credit scores to drop. In that case, until Steve is able to strike a better balance, his student debt could also impact his ability to borrow money in the future (e.g., a mortgage or auto loan). Before signing a loan application, take a look at your career aspirations and determine the earning potential in your region. If you fear lofty bills and a meager salary, it might be time to redraft your college plans.

 

    1. Beware of repayment traps. Educational loans are designed to help students achieve their dreams, right? In theory, yes. In reality, paying long-term and often exorbitant debt is never on a new grad’s list of goals. Although many lenders offer loans that delay repaying until 6-12 months after graduation, this “deferment period,” as the lenders terms it, will not help you along the path to a better credit score. To protect your credit score and prepare for life after college, consider adopting these strategies:
    • Pay as you go. Without proper planning, student loan interest has the power to take over a once-manageable debt. If you borrow from a private lender like Sallie Mae, variable rates could end up costing you much more than anticipated. Avoid future troubles by making interest payments while you are still in school. This strategy will help reduce your debt before graduation, allowing you to pay down the principal more quickly. It will also reduce your debt-to-income ratio, clearing the path for more manageable finances.

 

    • Say “no thanks” to grace periods. Many lenders offer students a post-grad “grace period” of 6-12 months before beginning their loan repayment. Nice, right? Well, unless the grace period is an official government designated “deferment period,” your loan may only accrue more interest as time goes by. If you can, skip any unofficial grace period, and begin repayment as soon as possible.

 

  • Shorten your repayment period. The average student loan can take 10 years to pay off. For larger amounts, private lenders are even willing to extend your repayment terms to up to 30 years. While this may reduce your monthly payments, lengthening the loan terms will undoubtedly cost you more over time. Shoot for a better credit score, and avoid long-term debt. Review your budget and determine how much you can contribute each month. Chipping in as little as $50 a month will help offset the interest and get you closer to becoming debt-free.
  1. Do not default. The chief risk of student loan debt is default. Failing to pay your loans can result in lawsuits, wage garnishment, and ruined credit scores. If life after college is causing financial problems, make an effort to avoid default at all costs. Take on a part-time job, reduce your monthly spending, or ask family for help. When all else fails, consider your options of deferment, forbearance, or debt restructuring. Although such actions only delay the inevitable obligation to repay, these last resorts are still preferable to a life of collection calls and up to seven years of credit trouble.