Do student loans affect credit scores?
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UPDATED: Dec 10, 2012
Student loans can positively or negatively affect credit scores — the outcome depends on how a student manages the debt.
The years spent in higher education define an individual’s future. Not only do educations lead to better paying careers, but they impact a student’s financial history. Although student loans are different from most other forms of loans, they still affect a credit history.
But having debt does not automatically hurt one’s credit score.
Student loans are considered positive installment loans. If a consumer has several types of loans, it can diversify his or her credit profile and improve their score. Accepting new loans and managing them properly shows a lender that a borrower can handle multiple types of credit.
One of the largest factors for a positive credit score is paying bills on time. Some lending institutions offer automatic bill pay or reminder options to help borrowers stay updated on required monthly payments.
Borrowers should keep a close watch on their student loans through their education to ensure that all loans are up-to-date. Although the final amount might seem intimidating, the earlier a student monitors their loans, the better. Later on, if loans are consolidated, a higher credit score will enable the loan to transfer completely to the student (and remove the co-signer) or offer the student a more favorable interest rate.
Some loans are unsubsidized, which means that interest is accrued during the entire loan. If this is the case, students should try to make payments during their education. This will help to cover the cost of interest that accrues during the educational period. If the loan is subsidized, the interest will be paid by another party. Other forms of private and federal student loans benefit from early payments as well.
Student loans are different from other forms of lending. Unlike mortgages and auto loans, education cannot be revoked. Student loans are not dischargeable in bankruptcy. They follow borrowers and co-signers until the loan is paid off. Although new reforms are available, such as the Student Loan Forgiveness Act of 2012, the loans are still attached to a borrower’s credit history for many years to come.
Student loans can be one of the largest credit decisions that young adults make for their financial future. If loans are taken out responsibly and paid in a timely fashion, a higher credit score will be achieved. If the borrower defaults on their loans, they risk losing lending opportunities for future purchases such as a new home or car.