I officially have student loans.
Let me rephrase that. I am officially repaying my student loans.
For a good part of my financial journey my student loans were in deferment because I was in graduate school. Considering when I started graduate school my salary was around $32,000 I gladly accepted deferment and took the opportunity to focus on the rest of my financial life.
Despite my personal circumstances, student loan questions are and remain one of the top categories I receive questions about and for good reason. Almost everyone I know who went to college has some type of student loan debt. I mean sadly, I know people who could buy a home with their student loan amounts. According to the Federal Reserve, in 2012 there was roughly between $902 billion and $1 trillion in total outstanding student loan debt in the United State. Approximately 60% of students had student loan debt.
While I plan to write more posts on student loans, to get us started here are four ways that student loans impact your credit.
1. For people who don’t have credit, student loans are a way to establish credit history.
Because virtually every US citizen is eligible for student loans, the loan administrators don’t have the liberty of turning folks down that have thin or less than stellar credit files (Federal loans are different from private loans). If you don’t believe in credit cards, student loans can be your opportunity to demonstrate your ability to reliably repay debt.
2. Student loans are considered installment loans and can boost your credit rating.
Before I understood credit the terms installment and revolving credit confused the mess out of me. So let me simplify it.
Revolving credit is credit that doesn’t have a specific number of payments attached to it and is usually used on a regular, as-needed basis. I call it flexible. Credit cards are the most well-known type of revolving credit. You spend, you pay off, you have the ability to spend again with a varying monthly payment based on your spending. Payments can go on for as long as the line of credit is open.
Installment credit is credit that is set. It has a specific, finite number of payments (referred to as terms) and usually comes in the form of loan that is taken out and paid back in even increments based on a number of months. Student loans, car loans, personal loans, and mortgages are examples of installment credit; payments on these loans don’t vary from month to month and are supposed to have an end date.
Because student loans are considered installment loans, they can add to your credit mix, which accounts for 10% of your credit score. While 10% may sound negligible, it can make a difference. So if you are like me and live in NYC and can’t afford a mortgage, student loans provide that opportunity to mix your credit up a bit.
3. Potential creditors consider student loans to be good credit
This doesn’t meant that regardless of your payment history, it’s viewed as good, so lets not get out of hand. This means that creditors look at it as a necessary evil that is an investment in your future. Having $35,000 in student loan debt vs. $35,000 in credit card debt is viewed differently by potential creditors and will be treated differently during the review process when lenders decide whether to grant a mortgage, auto loan, or small business loan.
4. You generally have about 60 days before federal loan lenders report your account past due to the credit bureaus at the end of the month.
For some reason I didn’t receive paperwork after my loan came out of deferment post graduate school and I was 6 days late on the payment when I caught the error. I went into a panic, almost had a breakdown and thought my MyFabFinance badge was going to be snatched from me. I was relieved to find out that there is generally a grace period before your report is dinged. I do not recommend factoring this into your repayment strategy because a lenders repayment policy is up to them, but if you find yourself a few days late, you are generally okay. But get a payment in as soon as you are able. If you are finding it difficult to keep your payments organized I highly recommend the My Fab Finance Financial Organizer to get you in order.
As stated in the opening, I plan to cover student loan debt more as my experience with it goes on. Please feel free to send me your questions as well as comment below.