Student Loans and Your Credit: What You Need to Know

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Student loans are wonderful assets for those who want to go to college and further their education, get ahead in life and make for a brighter future. But they are also deadly to those who cannot afford them. It’s a way you can afford to go to college when you cannot otherwise afford to go to college, but there are some things most people simply do not know about student loans that make it impossible for you to use them wisely. They do affect your credit, even if you aren’t paying them off for many more years until you graduate and have a real job in the real world.  Student loans can be helpful, but they can also be harmful. That’s why we’ve compiled a list of things you must absolutely know about student loans so that you can make the most educated decision about applying for one before it’s too late. Read on to find out what you need to know about student loans.

You Have to Have Good Credit or a Co-Signer

To obtain a student loan, you have to have either a good credit history to your name or someone who will co-sign the loan so that you can have it. If you have to go with the latter, it’s important to realize that you will have to go be responsible for your loan otherwise it will affect the credit score of the person who co-signs, and people aren’t always willing to forgive those who mess up their credit and make it impossible for them to raise their own credit score.

Payments Aren’t Made Right Away

Student loans work well for college students because payments on these loans are not made right away. In fact, most student loans are not entered into repayment until a student either withdraws from college completely or the student graduates. And then most student loans have a grace period that allows the student to find steady employment with that shiny new diploma so that they can afford to pay back their loans. And most student loans are not short-term repayments, either. To keep payments low, many lenders will allow students to repay their loans for many years, making them cheaper payments. It works for the lender, however, because all this does is require the student to pay more in interest over the life of the loan.

Interest Does Occur

Interest may or may not, depending on the type of loan you have, accrue while you are in school. There is no way to say for certain which type of loan you have. However, it is important to realize that if interest is something that accrues while you are in school, you might want to consider paying that off each year so that you can keep your balance as low as possible, as well as take the tax break when you file your income taxes at the beginning of the following year.

Deferral

Deferral is not going to affect your credit. This is what it’s called when you have a loan and do not have to pay for it for a fixed amount of time. Deferred loans are typically deferred until a period after graduation, but even then can be deferred a bit longer if the student or former student is experiencing any type of financial difficulty. It can be a difficult situation to realize that student loans must be repaid when a student has yet to find employment anywhere, and that’s something you have to deal with on your own when the time comes. This will not affect your credit score, fortunately.

Forbearance

This is another type of repayment that is pushed back while the student either finishes school or looks for employment. Students who do not qualify for deferment can apply for this type of loan program to give them more time to pay for their loan or find the funds to do so when the repayment process begins. It’s nothing that will affect your credit score. However, it is something that might affect another lender if you should apply for another student loan and they see this on your credit report. It could raise questions in the mind of the lender as to whether or not you are capable of repaying your loans in the manner they expect.

Late Payments

Late payments on anything are always bad. However, you should know that when it comes to a late payment on a student loan, you could see a drastic decrease in your credit score that you might not realize could actually happen. For example, if you are late by a few days, you probably won’t see your credit score affected. However, you should still pay on time because you honestly just never know when your late payment might be reported. If you are more than 30 days late paying your student loan at any given time, expect to see that your credit score is at least 30 points lower than it was before you missed a specific payment. It’s a bad idea to make late student loan payments. If all else fails, call your lender and ask them if there is something you can work out so that you don’t have to make late payments and suffer the credit consequences of those actions.

Defaulting on Loans

Defaulting occurs when you just don’t pay your loans. And while you might eventually think that your creditor will say “Oh well,” and write you off, you are wrong. Most bad credit accounts disappear off your credit score after 7 years. You are written completely off and things are just going to go uphill from there provided you make on time payments. However, if you default on a student loan, know that it never goes away. This is not something that will ever disappear off your credit report, so you will not be able to get rid of it at all, ever. It will haunt you monthly the rest of your life.

Cancellation or Forgiveness

For some very few people with student loans, there is a chance you can have your loans forgiven or cancelled all together. This is something typically done for those in special situations, such as those who join the military or go overseas on deployment. Additionally, people who face exceptional financial hardship might see that their loans are forgiven or cancelled. If this happens, it will not affect your credit score. However, it might make it difficult for you to get a loan later on if a picky lender inquires about this on your score.

Debt-to-Income

In some instances, you can negotiate the payment terms so that you can afford them. They’ll be small and lengthy, and while they won’t affect your credit score, they will affect your credit. Lenders are less likely to give you loans if you have a big debt-to-income ratio, and student loans will kill this for you. It’s best to pay them off as quickly as possible so that they won’t affect your credit any longer than necessary.

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