Making the decision to go to college is not one that should be taken lightly. Not only is it an educational endeavor that can take years to complete, but it’s also incredibly expensive.
In fact, approximately 65% of all college students graduate with some degree of student debt. For this reason, many of today’s young adults find themselves questioning the impact these loans might have on their credit.
Here, we’ll discuss what student loans actually are, and how they might show up on your credit report, along with real life tips for using your student loans to help build credit and get a head start in life.
Student loans are exactly what they sound like: loans that students can take out to help them go to school. Then, once graduation has been accomplished, that same student can use their degree to earn a living and pay off the debt.
However, not all student loans work the same way or have the same terms. This is because there are different types of loans available, federal and private, and each comes with its own unique interest rate, payment plan, and more.
Regardless of the type of student loan you have, they all appear on your credit report in the same way. This is because student loans are classified as installment loans, which means they carry a balance that’s paid off in fixed monthly payments over time. It’s the same type of loan as a home mortgage and they both appear on your credit in a similar manner.
It’s important to note that there is no special class or consideration for student loans. But, this type of debt is different than revolving credit (which is typically associated with credit card use). Payments made on revolving credit accounts vary over time and depend on your usage. Installment loans require the same fixed payment every month, and it’s an amount that was agreed upon when the loan was taken out.
Once a student loan is approved, an account is opened between you and the lender. And, while the repayment term generally doesn’t begin until after graduation, the loan is reflected on your account almost immediately.
When it comes to credit reporting agencies, however, the loan will show up as “deferred” until the repayment period begins. This isn’t always the case though, especially when it comes to private student loans. This is why you should always make sure you understand the terms of your loan before agreeing to them.
Believe it or not, student loans are typically classified as a type of “good debt.” This is because, as costly as they can be, student loans are viewed as an investment for the future. And, they generally only increase the possibility of higher earnings down the road.
If you are unable to repay your student loans, the consequences can be severe. You could risk a lower credit score, collections, and even garnishment of your wages. If you find yourself in this situation, don't panic! Check out some options available for those struggling with student loan payments.
Overall, student loans aren’t a bad thing. They are helpful for paying to continue your education and they can be quite beneficial for building credit. Believe it or not, these types of loans are often one of the first ways a person gets started with credit-building.
However, student loans have some credit-building caveats: they’ll increase your debt load, but not your credit limit, and they negatively impact your debt-to-income ratio when you apply for a loan such as a mortgage.
Explore: How to Pay Down Student Loans Fast
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The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.