Student loan debt has become a huge problem for borrowers saddled with loans, and it’s easy to see why. The recent analysis from credit.com, an average college graduate just drops out of college with a good balance to repay.
The challenging part of claiming a debt is that the savings become tough, an average graduate with debt also makes an average monthly payment of $393 for at least ten years. Does this involve investment? It is difficult to ascertain that!
How does a student loan work for students aiming to study at international universities?
It covers the basic course fee and other related expenses such as (college) accommodation, exam and other miscellaneous charges.
A student is the main borrower. A parent, spouse or sibling can be the co-applicant.
This means that 1 in 5 people are struggling to make payments on time and are at risk for letting their finances spin out of control. While a number of factors come into play and make it more difficult for debtors to repay their loans, one thing is for certain — the student loan debt bubble, we get a lot worse before it gets better.
The power of having a student loan:
Many people, especially students are under the stress and false assumption that having student loan is a dead-end for your credit score. In fact, financial attorney Leslie Tayne of Tayne Law says that having student debt could even improve your credit score under the right circumstances.
The biggest contributing factor to your credit score is your payment history – weighing in at 35 per cent of the decent score makeup, and the student loan payment history is included in that, says Tayne.
Keeping in mind about the default negative sides on the student loan and not clearing the debt on time and lead to damaging your credit history.
However, the opposite is also true.
“A shoddy payment history makes you look like credit risk, but always making your student loan payment on time can have a positive impact on your score,” notes the financial attorney.
But your payment history isn’t the only area where student loans could leave you with better credit over the long haul. Tayne says that the mix of credit you have on your report is another area where having student loans can actually help your score.
That a good credit mix includes a combination of revolving credit accounts like credit cards and instalment loans. Since student loans are instalment loans, they have the potential to improve your credit mix and add more depth to your credit profile.
The age of Credit!
Having a student loan impacts your age of credit, says Tayne. “The longer the positive credit history you have, the better.”
Since student loans come with standard repayment plans, that last ten years and many students opt for lengthier repayment plans or even income-driven repayment plans.
Certain repayment options last for 20 to 25 years, this is yet another area where student loan debt can work in your favour.
The red alert!
At the end of the day, the real risk student loans pose to your credit score only comes into play if you wind up having problems with repayment. For starters, paying your student loan payment late each month will absolutely impact your credit score in a negative way. Student loans have the highest benefit and this is one critical factor that should be kept at the heart of credit score.
Just as if you paid a credit card bill or your mortgage late in any given month, the interest stacks one above the other.
Of course, the stakes only go up from there.
“If you default on your student loans, your debt will go into collections,” says Tayne. “Any time a debt is in collections, it is reported to the three credit bureaus – Experian, Equifax, and TransUnion” Tayne says evidently.
From that point on, your debt shows up on your credit report as debt is in collections, further hurting the credit score. And the longer these debts remain uncleared, the more damage will inevitably occur.
If a student loan is damaging your credit score because you keep making late payments or your debt is still in default, there are several steps you can take to get back on track.
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’ll need to agree to repayment on an income-driven repayment plan or make three consecutive, on-time payments on your loan before you move forward.
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If you have a student loan debt and worry about the impact on the credit, there is absolutely nothing to worry over it. Even if the loan balances are high.
Like with other accounts you have, the key to using student loans to build good credit is paying your bills early or on time each month.
If you’re worried you can’t truly afford your student loan payments for the long-term, you can also look into income-driven repayment plans that let you pay a percentage of your discretionary income for 20 to 25 years before forgiving your remaining student loan balances in their entirety.
“You may also wish to consult a debt attorney to help you manage your debt and avoid going into default,” says Tayne.
Like other bills you have, student loans can only impact your financial health if you let them. Your best bet is exploring all the repayment options available to you and taking steps to ensure your monthly payment is affordable and easy to manage. If you stay on top of your monthly payments for long enough, your debt will eventually be gone for good.