When it is time to go off to college, students are usually overwhelmed with the changes, including the idea of living on their own, their path of study, and if the college experience will change them. One thing that most students don't consider is how their student loans will affect their credit.
Most students have to take on some sort of financial aid to attend college and more than likely that will include student loans. While many are aware that they will have to repay the loans, few of them realize how their student loans will affect their finances in the long run.
Your Credit Score
Your credit score will play a vital role in your financial future, as it gives lenders a general idea of how financially responsible you are, how much you rely on credit and whether you make your payments. Using this and other related information, lenders decide if you are a good credit risk. This not only affects whether they will lend you money or finance your home, car or other items, but it could also determine whether you are able to get loans and financing at competitively low rates.
If you have a low credit score, you may not be eligible for loans without a co-signer that has good credit score, or the loans you receive may be at rates that are higher than what is available to people with good credit scores.
How Student Loans Affect Your Credit
Student loans have the same effect that most forms of debt have on your credit. If you make timely payments, your credit score will not be adversely affected. If you miss payments and payment deadlines, it could result in your credit score being lowered.
Repayment of student loans creates a challenge for many college graduates, as the repayment amounts are usually large when compared with the entry level salaries that they receive. It is even worse for those who are unable to find jobs. Consider that the U.S. unemployment rate is a staggering 8.1% and a significant amount of the unemployed are college graduates. It also doesn't help that college is starting to become more expensive, with the price of college tuition rising faster than the average income for families.
Ways to Manage Student Loans
If it ever gets to a point where you cannot afford to make your loan repayments, you have a few options that can help to either suspend or lower repayments.
Consolidation is combining several loans into one so that you have one repayment to make instead of multiple repayments. Usually, repayment is lower, but you may have a longer repayment period. For federal loans, the Federal Direct Student Loan Program allows you to consolidate most federal loans. In the case of private loans, you can apply for a loan and use it to pay off multiple private loans, so as to consolidate the amount and roll multiple repayments into one. Caution: Before you apply for a consolidation loan, check the interest rate to determine if your repayments will be higher, and if it would cost you more in the long run.
Deferring your student loans means that you postpone repayments until a later date, and interest does not accrue on the amount if the loan is subsidized. You are required to meet certain requirements in order to be able to defer your student loans, such as:
- You must be enrolled at least half time in an eligible postsecondary school or studying full time in a graduate fellowship program or an approved disability rehabilitation program
- You must be unemployed or meet our rules for economic hardship (limited to three years)
- You must be in the Armed Forces
Similar to a deferment, forbearance allows you to temporarily stop making payments on your loan, temporarily make smaller payments or extend the time for making payments. Reasons for getting forbearance include:
- Financial hardship
- Serving in a medical or dental internship or residency
With forbearance, interest continues to accrue at the rate at which the loan was made. You also are not eligible for either deferment or forbearance if you have defaulted on your student loans.
The Bottom line
Effective management of your student loans can help to build your credit score, and make you attractive to lenders. If you find that you are unable to meet payment deadlines or afford repayment amounts, contact the lender immediately and discuss alternative solutions. These can help you to effectively manage your credit score and reduce the burden you would face from bills that you cannot afford to repay.