Will Student Loans Affect Your Credit Score?

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According to the Wall Street Journal, the average college grad in the class of 2015 will be $35,000 in debt on average. For many students, student loans are the only option for financing their college education when other options (Pell Grants, school-based awards) fall short in covering college-related expenses. If you’re among the millions of college grads with a student loan balance,  you might have questions regarding your credit rating and student loans. Here’s the rundown:

Student loan debt is regarded as “good debt”...when payments are made on time. “Good debt” is seen as a loan or expenditure that will ultimately increase value in the long run. Other examples include mortgages and business loans. These are all seen as debt that was accrued in order to provide a valuable asset to society  either in terms of a higher-paying job, starting a business, or creating long-term residence in a community (mortgage loans).

At the same time, if you were to run up $35,000 in credit card debt, the credit rating agencies wouldn’t hold that debt in the same positive light as your student debt.

By maintaining your good standing in your student loan payments, you could potentially qualify for other forms of credit later on.

The consequences of falling behind on your student loan payments (or failing to pay them altogether) are far-reaching. You overall credit rating will suffer, making it harder for you to qualify for a car loan or mortgage. If you are able to qualify, you’ll be charged a higher interest rate or additional fees. A low credit rating or credit score will also affect your ability to rent a home or apartment; you could end up paying a higher deposit than a tenant with a higher credit rating.

There are also tax  consequences to defaulting on your student loan payments. Since most student loans are issued by the government, the government lender has the right to seize your tax refunds until the loan is brought current.

If you’re having trouble making your student loan payments, don’t wait until the loan goes into default. Contact your student loan servicer to see if you qualify for a forbearance (temporary suspension of your student loan payments) or an alternate payment plan. Be persistent and enlist a student loan advocate if you need to.

Staying current on your student loan payments can have a positive impact on your credit rating. You’ll have an easier time qualifying for other loan products such as car loans as long as you can make payments on the additional debt. Unlike credit card debt, student loans are regarded as “good debt” and are held in higher regard by the credit rating agencies.

Defaulting on a student loan payment can have far reaching consequences, from being denied additional loans to paying higher interest rates and rental deposits.

Additionally, any tax refunds can be seized as payment of your past due student loan debt, which can be bad news if you’re anticipating a sizable tax refund.

By understanding the impact of student loan debt on your credit rating and the consequences of late or defaulted payment, you’ll be in a better position to take charge of your financial future and to take action should you fall behind on your payments.

 

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