How Do Student Loans Affect Your Credit?
Given the cost of a postsecondary education, student loans are much more of a reality today than they were for previous generations. This means student loans must be a key part of family discussions on college or university. While student loans may feel like a burden, paying them on time may actually help establish smart credit habits early in life.
Consider future student loan payments as part of your decision.
Heavy student loan debt can be a tremendous burden on new graduates. It can limit their choices of jobs because they often must earn enough to pay off their debt, especially if they can’t count on financial help from parents or other family members. In the long run, significant student loan debt, like any other debt, might also delay or limit the borrower’s ability to buy a home, start a business, or even begin a family. But learning more about student loans and repaying them may help dispel some of these concerns — including how they may impact your credit.
Here are some of the ways your student loans might affect your credit and what you can do to handle them responsibly.
A student loan, like a car loan or mortgage, operates as an installment loan, meaning that the borrower repays a principal amount, with accumulated interest, over a certain period of time. Unlike a credit card account that someone might keep open for future use, once an installment loan is paid off, the account is closed. Your student loans will affect your debt-to-income ratio — the amount of debt you carry compared to your overall income — which, if especially high, may affect your ability to obtain new credit.
Your student loan repayment plan becomes part of your payment history, which is the biggest element considered when calculating credit scores. Knowing when your first payment is due is important, but first you need to decide which repayment plan is best for you.
The payment plan you choose will determine your minimum monthly payment, so it is important to understand what you can afford to pay and how your payments will affect your credit. Making on-time payments every month is a positive habit to get into, but if your payments are so low that you are not lowering the original amount you borrowed or so high that you can’t make payments on other accounts, it may be time to identify other options.
For many borrowers, student loans are not only an opportunity to get an education, but also to prove that you can pay back loans responsibly. Making on-time payments and paying off student loan debt are important steps in building healthy credit and laying a solid foundation for your financial future.