College has grown extremely expensive in the last decade or so, and even when attending a public university, Americans are probably facing substantial costs for working toward their degrees. For these reasons, many college kids now take out student loans, but may not be aware that doing so can have a substantial impact on their credit standings going forward.
This might be especially true in the wake of new legislation about how interest is calculated on student loans issued by the federal government. Lawmakers recently let the law that kept interest rates on this type of financing limited to just 3.4 percent lapse, and instead passed a new rule that makes those for undergrads stay at 3.86 percent, while grad students can expect to pay 5.4 percent for the coming school year, according to a report from the Detroit Free Press. However, it's important to note that those rates are only applicable for student loans taken out this fall, and overall are tied to market interest rates.
This means that as those rise or fall, so too would the amount of interest college students would be charged, the report said. Problematically, most experts believe that rates will likely rise from their current levels, potentially in the relatively near future. For this reason, those who are still in college and likely will be for a few more years may want to consider the costs they're going to face, and what impact they might have on their future credit standings.
The good and potentially bad
The most important thing student loans can do for young adults is help them to establish a responsible borrowing history, as many may not have access to credit prior to obtaining this type of financing. In this way, you'll be able to benefit from healthy management of the account once you graduate, meaning that you'll need to make sure you're paying your bills for these balances every month on time and in full.
In fact, those who have limited borrowing histories may not even know just how important a factor the ability to meet every payment deadline is. It accounts for a full 35 percent of your scores all by itself, making it the single largest factor that goes into determining your ratings. Unfortunately for many young people, they may be suffering from diminished credit scores because a large amount of student loans are currently considered delinquent because they've missed at least one deadline. Even one missed deadline can drop a credit score by more than 100 points with ease, and thus it is very important to make sure you can afford your payments every month.
That's often easier said than done for many recent college graduates, though. The job market remains difficult for many young people with limited work experience in their fields, and as such, the obligations they may face within a few months of leaving school might be too much for them to reasonably bear. Fortunately, there are a number of ways in which recent graduates with large student debts can handle these issues, including income-based repayments, deferments, and more. Exploring your options in these cases may help save your wallet and credit scores alike.
What else to know?
Of course, most college students have more credit than just their education financing by the time they graduate. Many may also have auto loans or credit cards in their name that will likewise require attention, and these cannot be deferred or worked around in the way that student loans can. For this reason, many young adults will probably need to come up with a plan for how they will manage all aspects of their finances under these new money-related realities.
As far as you're concerned, that should include budgeting carefully so that you know you'll be able to rely upon having the money to pay your bills every month. This will help you to avoid not only the credit damage that comes from missing a payment in general, but also penalty fees or interest rates that can be applied to your accounts in the event that you can't meet that deadline.
Another very important aspect of properly handling a credit score that many young people may not know about is ordering copies of your credit reports regularly. Doing so may help you to get a complete picture of your credit standing, and also potentially spot any unfair markings that may be having a negative impact on your scores overall. If you discover any such entries on these documents, it might be a good idea to contact a credit repair law firm about the situation, as this may allow you to get the problems sorted out as expediently as possible, and return you to where you deserve to be.