How Do Student Loans Affect Credit Score?

Short answer: It shows up on your credit report

Photo courtesy of Pexels.

One thing they don't tell you before graduation is how soon you have to start paying up. The clock starts ticking once you receive your cap and gown, with a six month grace period. As of 2021, the total national amount of federal student loan debt has surpassed $1.73 trillion. Each individual borrower owes an average of $39,000 each.

Luckily, recent college grads in the pandemic have gotten an extension on the payment pause without accumulating additional interest for their federal loans. That relief ends promptly starting on January 31, 2022. However, if you took out private loans, then this extension doesn't apply to you. The usual six month grace period is in effect. That means if you don’t pay on time, it will affect your credit score negatively. 

Have no fear, because there are certain plans that you can make ahead of time in order to start paying back your loans effectively. By consulting your university’s financial aid office prior to graduation, securing employment quickly after graduation and through assistance from economic professionals, anything is possible. These are some of Grantford’s tips for understanding how your student loans can affect your credit score and how to plan ahead for repayment. 

The average FICO credit score reached 711 in July 2020. Around 6 in 10 Americans have a score above 700. Photo courtesy of Pexels.

A Beginner’s Guide to Understanding Your Credit Score 

Your credit score is ultimately determined by your cumulative credit history. The credit score is a three digit number that can range anywhere from the lowest at 300 to a high of 850. Around 18% of adults aged 18 to 24 have never checked their credit scores before and have little understanding of what their credit score means. It’s difficult to understand a credit score without a proper education or background in credit related knowledge. Many adults take a class in order to understand their credit. Hopefully, this gives you some insight into comprehending your credit. 

Your credit score cumulatively describes your credit worthiness to a potential loaner. This worth is based on your credit history, which includes the number of open credit accounts (i.e. credit cards), your total level of debt, and your repayment history (whether you make payments on time or not consistently). Sometimes, other factors can determine your credit score, but these are the main things that can make or break your credit. 

Expectedly, a good credit score helps you in the long run, assisting you with many of life's ins and outs. In the current capitalistic society that we live in, your credit score can be the difference between buying a mortgage, financing for a car loan, or other large purchases. Having a bad credit score can really put a damper on your life. If left unchecked or undermanaged, a bad credit score can cause damage that can even affect your loan interest rates. To determine your credit score, you can use the Free FICO Score Estimator

Your total student loan amount and payment history goes on your credit report. The best way to keep your credit score up is to always make payments on time - this establishes a good credit history and reliability. Photo courtesy of Pexels.

How Do Student Loans Affect Your Credit Score?

Student loans work in the same way that any other loan would work for repayment, and affect your credit score similarly. If you pay them back on time and in the manner in which is agreed initially then you will be okay. When you miss a payment, the lender can report this to credit bureaus and ultimately it’s what can negatively follow you for years to come. 

Student loans are generally paid in monthly installment amounts that have been previously established when you agreed to take out the loan. This can be adjusted based on your annual income and ability to repay at the time. For instance, if you are a recent college graduate and you are still searching for full-time employment, most lenders will give you some leeway and adjust the installment amount based on your current income. However, you need to let your lender know about these issues ahead of time in order to avoid any misunderstanding.

Having a bad credit score can negatively affect you in unforeseeable ways. For instance, students who have a fair credit score rating may pay more interest for a loan than someone who has a good credit rating. A low credit score is due to late repayments and by having too many credit accounts open at once. By properly managing your finances, you can avoid any issues that may come up with repayment and adjust the terms of your loan so it doesn’t hurt your credit.

Setting Up a Plan to Pay Back Student Loans

In the whirlwind of months prior to graduation, many colleges will require students to go through exit loan counseling. These are typically an hour long session which will loosely go over the requirements for repaying your student loans. They are helpful with understanding your loan repayment at first, but sometimes people need ongoing and consistent financial advice. Here are some tips on how to pay back your student loans smoothly.

The best way to start planning on how to pay off your debt is by looking over your current budget. it's advised to generally shut down on unnecessary expenses and to prioritize what’s crucial. Some people will finance in spendless weeks or months, or refrain from eating out often.  by cutting down on these costs are able to redistribute that money toward your debt. you'll thank yourself later oh, when you're able to spend money on those things guilt-free.

When you're first getting started it's good to pay off the interest that you built up during the grace period. When you start to pay this off first and prioritize it, it helps cut down the average amount you will have to pay monthly, making it a more manageable recurring repayment. Even when you start doing the periodic  monthly payments, it's advised that you pay more than what is the minimum amount so that you can avoid having to pay more in interest later. The longer that the loan lives on the more interest that it accumulates. Meaning that if you're able to pay it off faster than you will end up paying less than if you wait too long to finish paying it back.

Our advice is if you have the ability to financially, it's best to finance by paying more than the minimum requirement. Once you have established your career or scored a full-time position, repaying it in this way will put you on the right track. By choosing the right repayment plan for you, you'll be able to consolidate your payment in the best way that works for you. 

99% of Americans don’t pursue help from professional financial advisors because they believe it's too expensive. Most people do their financial planning on their own or with the assistance of family members or their spouses. Photo courtesy of Pexels.

Get a Professional Financial Advisor 

If all of this seems really, really intimidating, it might be a great idea to get a financial advisor who can evaluate your personal loan situation and discuss the best ways for you to set up a payment plan. There is no problem with getting help, especially if you don't know what to do. Some people have never received financial advice from their family or were never taught financial literacy in school. By getting a personal advisor or through taking a free course on financial literacy, it might save you more money and time trying to figure out the best next steps for you.

Although this article might be the first step in your research of how to repay your loans effectively, and how your loans can potentially affect your credit score, there's always more work to be done. Once you have comprehended your plan completely, you'll be well on the way to figuring out  how your student loans can get repaid. It doesn't have to be hard, but it's honestly not the easiest process without some assistance. Student loans can already feel like a crippling debt that can follow you forever but with a good plan, things will turn out smoothly.

Liz Anastasiadis
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