Student Debt and Your Credit Score

We have a bit of a blind spot when it comes to student loans. Because education is viewed as a necessary expense, we often don’t think about the impact its cost can have on our future.

According to The Wall Street Journal, over 7 million graduates are in default on their student loans. This figure accounts for approximately 17 percent of all borrowers. As a result, millions of millennials are unknowingly ruining their credit scores through student debt.

When seeking an education, many students fail to consider the impact that student debt can have on their credit. Your credit score — a number assigned to you that indicates your trustworthiness to lenders — is your financial lifeblood. A poor credit score can make it difficult to finance major life purchases, like a new car, and to truly advance in life.

The Effects of Student Debt

What is the relationship between student debt and your credit score? There are many ways that student loans can affect your credit rating. Student loans are a “good” type of credit, since having them on your report and making regular payments will help you build a reputable score. This is an especially effective way of bolstering your credit, considering flexible payment options like deferrals and forbearances — have no negative impact on your score.

While this may paint an optimistic picture, the reality is that student debt is harming the credit of many graduates. Flexible payment options may seem like a shield against student loan defaults, but graduates fail to make student loan payments at a disturbingly high rate, as demonstrated earlier by The Wall Street Journal.

Unfortunately, student debt can harm your credit score when handled improperly. Failing to make timely payments on your student loans can be problematic. Consistently failing to make payments may cause your loans to default, which can be devastating to your score.

In these situations, major life purchases, like buying a new or even a used car, can be near-impossible. While individuals with student loan problems can still qualify for bad credit car loans, defaults are a major financial burden. Current students may have a cosigner, such as a parent, to help qualify for an car loan. Balancing auto loan and student loan payments may seem difficult, but it can be done through smart planning.

How to Improve Your Credit Score

Looking to improve your credit score? As we’ve written previously on CarLoan.com, there are many ways to do this, but improving your score generally constitutes two basic strategies: keep paying your bills on time, and reduce the amount of debt that you owe. In addition to this basic advice, there are some strategies that recent graduates can employ to further improve their credit score. Acquire a copy of your report and dispute any errors. Use a credit card and keep the balance low. Consider seeking a credit builder loan.

If you want to have any hope of improving a bad credit rating, however, you must first address any student loan defaults. If you’ve already defaulted on your student loans, there are some options: You can escape student loan default through loan repayment, loan rehabilitation, and loan consolidation:

  • Loan Repayment: Simply put, this involves outright repaying the full amount of your student loan. While this is an unlikely option for most millennial borrowers, it is the simplest solution to a student loan default.
  • Loan Rehabilitation: Some government loans are eligible for loan rehabilitation. This entails a written agreement for the borrower to make timely payments for at least ten months. The monthly payment is dependent on your income, and payments can be as low as five dollars. After fulfilling the agreement, the default status will be lifted from your loan.
  • Loan Consolidation: Alternatively, borrowers can consolidate their loans into a Direct Consolidation Loan, combining their federal loans into a single new loan. Keep in mind that while consolidating permits you to defer and forbear future payments as needed, it will not remove the default from your credit report — so your score will still be negatively impacted.

Your financial situation will dictate which of these three are realistic options, but you must clear a default from your record before you can begin to build good credit.

Improving your bad credit history involves smart planning and getting your loans out of default — not putting your life on hold. Intelligent borrowers can manage student loans while affording a car as well, lending them the mobility needed to advance in life. Student debt is having a clear negative effect on millions of graduates. Don’t become a part of this statistic.