This year, Forbes released staggering statistics showing that student loan debt in the United States now totals $1.6 trillion. The average individual student loan debt in the US now totals $32,731, with nearly 11% of borrowers reporting that they’ve recently defaulted on their student loans.
Even though the CARES Act and recent executive orders allow borrowers to enjoy a suspended payment period and 0% interest on federal student loans due to the coronavirus crisis, there’s a lot to know about how student loans affect your credit score and overall financial health.
Do Student Loans Affect Your Credit Score?
Yes, they do! However, student loans don’t affect your credit score in the same way that a mortgage loan or credit card debt might.
Let’s start with the positive aspects of student loans as they relate to your credit. For most young people, building up a credit history is a hard task. Unless your parents add you as an authorized user on their credit card or you’re able to get a credit card optimized for college students and young spenders, it’s hard to build a history of credit.
Seeing as most students begin to take out loans around the ages of 18-20 when they head off to complete secondary studies, these loans can help younger people start to build up a long history of credit. In this sense, student loans have a positive effect on their credit score.
Likewise, once you enter your repayment period, paying off loans can positively affect your credit score and demonstrate to future lenders that you’re financially responsible.
How Do Student Loans Lower Your Credit Score?
So, when do student loans lower your credit score? Well, the obvious answer is that they’ll hurt your credit score if you miss payments. More specifically, they’ll definitely hurt your credit score if you go into default.
This is where student loans differ from other types of loans, however. Every 30 days, creditors report payment history to the credit bureaus. This isn’t always the case with student loans.
Private lenders do tend to report missed payments to credit bureaus after 30 days. But if you have a federal student loan, likely, your service provider won’t report a payment late until at least 90 days after it’s overdue.
Paying late can affect up to 35% of your credit score, and if you default on your loans, that derogatory mark will stay on there for up to seven years, which means you’ll be well out of school by the time you’re able to rebuild that part of your credit.
Solutions for the Smart Repayment of Student Loans
The mere act of taking out student loans doesn’t automatically affect your credit score. As long as you’re smart about how you repay them and try to ensure that you don’t miss payments, you’ll find that your credit score will likely increase.
If you’re having trouble making payments, we suggest contacting your lender. Federal student loans are eligible for various types of repayment plans, including income-driven repayment that means your monthly payments are set according to what you earn.
This is especially helpful for those who are just out of school and either haven’t found a job yet or have found a low-paying job that might not allow you to make the regular minimum monthly payments.
Stay on Top of Your Credit Score
Paying off student loans isn’t fun for anybody. However, it’s easier to stay motivated if you’re able to celebrate your wins and watch your credit score go up over time.
Float allows you to do that, and we even make it fun. Share your credit score, or a simple emoji indicating credit range, with your friends and family. You choose how much information you want to share with others, making it easy to see where your peers are at and build a team of credit-savvy cheerleaders around you to help you reach your financial goals.
Download Float today to get started.