Getting a college education can have a big impact on your future earnings as a professional. For example: from 1996 through 2014 alone, incomes for college educated middle-aged Americans jumped up 23 percent, while those who only had a high school diploma fell nearly 10 percent.
As the pay gap continues to grow, the value of having a college diploma has become clearer than ever. And for millions of Americans, this means taking out one or more student loans to get through college and start a rewarding career.
But even with your sights set on a college education, you still might be wondering: how will these student loans affect my credit both now and in the future? Here are just a few important things to consider.
Your credit score is a three-digit number that enables lenders to quickly assess how much risk you represent as a borrower. While there are several models used to determine a credit score, most lenders use your FICO score as a way of seeing if you’re a good fit for a loan or any other type of credit.
FICO scores range from 300 to 850, with numbers at the higher end of the spectrum showing a lower risk to lenders. When you request your credit score, or have it pulled by a lender, your number will fall somewhere on this scale based on information included in your credit history.
When it comes to most federal student loans, you don’t need to have a high credit score to get approved for a loan. In fact, most of the time your credit score won’t be considered, unless you’re seeking approval for a federal PLUS loan. Even then, only an adverse credit history will affect your approval.
Private student loans, on the other hand, regularly use FICO scores to judge whether you can afford a loan at all, and to determine how high your interest rate will be if you’re approved. So, in the case of private loans, you or a co-signer will likely need a good credit score (above 650) to secure a student loan.
Any student loans you take out will become part of your credit history. No matter which federal or private lender you go with, your student loans will be reported to each of the three major credit bureaus, and start impacting your credit the moment they become active.
To the three major credit bureaus, student loans are usually considered installment plans, meaning they’ll keep an active record of your payments every 30 days. If you’re making your monthly payments on time, you’ll start building your credit immediately, and at the same time raise your credit score.
However, if you’re late on payments or miss them altogether, your credit score will begin dropping every 30 days, and you’ll be perceived as a greater credit risk to lenders. And while it may only be a few points on your credit score at the beginning, things can get complicated rather quickly.
Student loans, just like home mortgages and car loans, are installment loans – or loans that are paid back over time. These types of loans are often considered by lenders to be an investment in your future, instead of money spent on luxury items that are typically purchased on a credit card.
Revolving credit, like credit cards for example, don’t have fixed payments over a fixed time period. This means you could be spend months, years, or even decades paying on a revolving credit line, along with all the interest that has accrued on your remaining balance.
Both installment loans and revolving credit are good for your credit history because they show creditors that you have a variety of loans you’ve been approved for and paid regularly. While the types of credit may not have a big impact on your overall score, making on-time payments on installment loans may play a big role in a lender’s decision to offer you more credit down the road.
If you miss several monthly payments and your student loans go into default, your credit history will almost certainly take a hit. The good news, though, is that you do have options to fix your credit and get back in good standing.
One of the ways you can repair your credit after missing payments on your federal student loans is through student loan rehabilitation. While most federal plans will let you get caught up on a few missed payments, if you’re more than nine months (270 days) delinquent, your loans will probably go into default, and you’ll need to repair them as quickly as possible to avoid wage garnishments and permanent damage to your credit.
If you’d like to know how to get out of student default as quickly as possible, our guide will walk you through the process. You can also get a free assessment or speak with one of our student loan experts by phone at (800) 670-4196 to start the process immediately.