A student loan may be the largest debt a college student can take on in his or her young life. Some may be intimidated about the prospect of paying back the loan when they graduate, but it’s not impossible to both pay down a student loan and maintain a good credit score.
How do student loans affect a credit score?
Like any other debt, student loans do have an effect on consumers’ credit scores, but it’s not necessarily negative. That’s because debt is generally broken down into two categories — installment and revolving loans. Installment loans are fixed payment debts that include mortgages, auto and student loans. Revolving loans, such as credit cards or home equity loans, vary in terms of how much is borrowed and how much is repaid. Installment loans generally have a less severe impact when calculating credit scores and reports, meaning a student loan in and of itself won’t significantly harm a good credit score.
Strategies to pay off a student loan
Of course, failing to repay a student loan will almost certainly drag down a person’s good credit score. However, there are ways to stay current on payments and limit how consumers’ credit scores and reports are affected.
- If necessary, defer payments — Most student loans have a built-in grace period — generally between six and 12 months — that allow graduates the chance to find a job before they start to repay their loan. However, if recent graduates find themselves unable to earn a steady income even after the grace period, or if they’ve decided to continue their education at graduate school, it is possible to apply for a loan deferment with most lenders. This will prevent graduates from damaging their good credit score by skipping payments because they can’t afford them.
- Consider changing loan terms to lower payments — If monthly payments are becoming too onerous, it may be practical to consider extending a loan’s payment period in order to lower monthly costs. While it will take longer to pay the loan off and increases the period during which the debt will accrue interest, this action may prevent credit score damage by ensuring a borrower stays current on his or her payments in the short term. It’s also possible to shorten loan terms later on, when income levels might be healthier.
- If possible, pay it off earlier — On the other hand, making more than the minimum payment when possible can help pay off the loan sooner and minimize the amount they’ll pay in interest. While this won’t benefit graduates’ credit scores and reports, it also won’t hurt, and it could save them money in the long run.