Student loan debt has become a huge problem for borrowers struggling with loans, and it’s easy to see why. Not only does the average college graduate with student debt leave school with a balance of $ 31,172 according to a recent Credit.com analysis, but total student loan debt has now exceeded $ 1.52 trillion nationwide. The average graduate with debt also makes an average monthly payment of $ 393 for at least ten years, which makes it more difficult for them to save for the future, buy a house or invest so that they can retire one day.
Even more tragic is the fact that, by a study by the Federal Reserve, 19 percent of those with student loan debts are behind on their payments and are headed for default. This means that one in five people struggle to make their payments on time and risk losing control of their finances.
While a number of factors come into play that make repaying their loans more difficult for debtors, one thing is certain: the student debt bubble we are in right now could get worse before it gets better. .
The benefits of having student loan debt
Nonetheless, it’s important to note that having student loan debt doesn’t have to be the death knell for your credit score. In fact, financial attorney Leslie Tayne of Tayne Law says having student debt could even improve your credit score under the right circumstances.
The main factor contributing to your credit score is your payment history – weighing 35 percent of your makeup score, and your student loan payment history is included in that, Tayne says. Missing payments, late payment or payment default on your student loans will negatively impact your credit score as a result. However, the opposite is also true.
“A poor payment history makes you sound like a credit risk, but still paying your student loan on time can have a positive impact on your score,” notes the financial advisor.
But your payment history isn’t the only area where student loans could give you better credit in the long run. Tayne says that the credit mix you have on your report is another area where having student loans can really improve your score. A good credit mix includes a mix of revolving credit accounts like credit cards and installment loans. Since student loans are installment loans, they have the potential to improve your credit mix and add more depth to your credit profile.
Also be aware that having a student loan impacts your credit age, says Tayne. “The longer your positive credit history, the better.”
Since student loans come with standard repayment plans that last for ten years, and many students go for longer repayment plans or even income-based repayment plans that last for 20 to 25 years, this is yet another area where student debt can work in your favor.
When student debt can ruin your credit score
Ultimately, the real risk that student loans pose to your credit score only kicks in if you are having repayment issues. For starters, paying your student loan late each month will negatively impact your credit score, just like paying a credit card bill or paying your mortgage at the end of any given month.
Of course, the stakes only increase from there.
“If you default on your student loans, your debt will go to collection,” Tayne says. “Whenever a debt is in collection, it is reported to the three credit bureaus – Experian, Equifax and TransUnion.”
At this point, your debt shows up on your credit report as debt in collection, which further affects your score. And the longer these debts are not settled, the more damage will inevitably occur.
If your student loan debt is hurting your credit score because you keep making late payments or your debt is still overdue, there are several steps you can take to get you back on track.
If you have federal student loans, for example, you can apply for loan pardon – a program that allows you to catch up on student loan payments with nine monthly payments over ten months. The payments you make during this period will be based on your income. So you may be paying less than normal and “catching up” on your student loans to get out of default.
You can also consolidate federal student loans with a direct consolidation loan. To consolidate loans that are already in default with this type of loan, you will need to accept repayment on an income-based repayment plan or make three consecutive, one-time payments on your loan before going ahead.
The bottom line
If you have student loan debt and are worried about the impact on your credit, you might not need to worry, even if your loan balances are high. Although your credit usage is the second most important factor that makes up your FICO score with a 30% impact, revolving credit accounts like credit cards tend to have a deeper impact on your credit score than credit cards. installment loans, says Tayne.
As with other accounts you have, the key to using student loans for good credit is to pay your bills early or on time each month. If you’re worried that you can’t really afford to pay off your long-term student loan, you can also learn more about income-based repayment plans that allow you to pay a percentage of your discretionary income for 20 to 25 years before forgiving your student loan balances in full.
“You may also want to consult a debt attorney to help you manage your debt and avoid going bankrupt,” says Tayne.
Like the other bills you have, student loans can only impact your financial health if you give them permission. Your best bet is to explore all of the repayment options available to you and take steps to make sure your monthly payment is affordable and easy to manage. If you stay on top of your monthly payments long enough, your debt will eventually go away for good.