How to Manage Student Loans Without Hurting Your Credit

Listen up parents and college-bound kids: It’s time for a harsh lesson about the myths of student loans. Student debt accounts for a $1 trillion deficit in this country, the largest it’s ever been. While it’s easy to say, “I won’t let my kids’ education costs spin out of control,” or “My daughter is smart; she’ll pay her loans back with no problem,” the reality isn’t that simple. A recent data poll revealed that 26 percent of borrowers are delinquent in repaying their loans, and an additional 13 percent have defaulted on their loans entirely. For those keeping score, that means 2 out of every 5 borrowers are currently struggling with education debt.

Our blog is dedicated to helping readers gain insight into credit repair, smart spending, and in this case, smart borrowing. Let’s start by clearing up some misconceptions about student loans and pointing you in the right direction. What you’ll find is a safer path and a healthier credit score.

Dangerous misconceptions include:

1. Student loans will help us afford college.

This is the first and perhaps most damaging misconception surrounding student loans. Yes, opting for education debt will put money in your bank account. Yes, you will have the ability to pay the Bursar’s office and attend classes in the fall.

“Didn’t the loans help us afford college, then?” you ask.

Read carefully: The answer is no.

True, student loans got you in the university door the same way a payday loan would help with bills before the end of the month. You covered your responsibilities—temporarily—but you’ll still need to pay back the balance with a hefty interest rate attached. Although student loans are marketed as helpful tools to afford college, the reality is much different. A loan is a loan, and you’ll end up paying more for education over time.

Credit fix:

Don’t listen to the PR spin surrounding student loans. Would you believe a credit card company who claims, “We’re just here to help you?” Student lending is a business, and just like credit, it can feel predatory without the right information. If you must apply for student loans:

  • Opt for federal loans.

    They provide government-backed funding with fixed interest rates, allowing you to accurately calculate how much you’ll need to pay back each month following graduation. Avoid loans with variable interest rates.

  • Look for discounts

    Are you planning to become a teacher, counselor, nurse, or public servant? The government is willing to forgive a large portion of your loans in exchange for your work in low-income, high need areas. Learn more about those opportunities here.

2. Student debt is good for a credit report.

Students are new to the world in many ways. Few have marketable skills, job experience, or financial assets of any kind. And why would they? College is the place to develop these skills and earn these rewards. Unfortunately, student loans don’t require any work or qualifications. Unlike a mortgage or a consumer credit card, the majority of student loans do not require a credit check. You may be wondering why this is a bad thing. After all, the average college student has no credit history, so why should it be a factor in lending?

Although it isn’t fair to deny student funds based on a lack of credit history, this practice sets a dangerous precedent in the minds of young borrowers. “If credit wasn’t a part of the lending process, then why should loans affect my credit?”

It’s no surprise that new grads struggle with credit repair after graduation. The staggering debt-to-income ratio caused by too many student loans can cause a problem when applying for a car loan, renting an apartment, and generally finding credit approval. It can cause bigger problems if monthly payments are more than you can afford as well.

Credit fix:

Don’t graduate with a weight around your neck. Make an effort to decrease your student loan burden before graduation. Apply for a Resident Advisor position to score free room and board and earn some extra cash. Use your money to pay off student loan interest while you are in school, preventing it from accruing into an amount you cannot afford. The result will lower your debt-to-income ratio and your monthly payments after graduation. You can’t lose.


3. Private loans are a necessary part of college funding; they pick up the slack when federal loans fail.

When you can’t cover the full price of tuition and expenses with federal aid, it’s private lending to the rescue!

It’s true that federal loans and financial aid can fall short when covering education costs. Federal loans are usually capped based on type, dependency status, and college year (i.e., freshman). Financial aid is need-based and depends on your family’s income and the amount available in the federal budget. Despite these facts, private loans are hardly “necessary.” Consider the following example:

Josephine is attending Purdue University in the fall. Her family doesn’t qualify for financial aid, and federal loans only cover 65 percent of her college tuition and expenses. Feeling hopeless, she considers taking out a private loan through Sallie Mae. Luckily, Josephine’s parents intervene and help her create a plan to make ends meet. Rather than using private lending, she will earn the remaining $3,500 each semester by:

  • Working part-time in the university library and applying for a work-study program to cover tuition
  • Opting for the smallest meal plan option provided by the university, allowing her to save cash on food. She’ll visit home each week to cook her remaining meals to store in her dorm room refrigerator
  • Researching book rental programs that allow her to save an average of $500 per semester on college textbooks

Credit fix:

When you have limited funds, it helps to be creative. Take a lesson from Josephine and her family: Use your imagination. Private loans can carry high interest rates and unrealistic repayment terms. Why not avoid credit-busting blunders with some ingenuity? College is meant to open your eyes and help achieve the life you want. Don’t let student debt stand in the way of your future.