How A Student Loan Affects Credit

With the average student taking five years to finish college, many people in their mid 20s end up with massive debt. Rising education costs have forced more college students to take out student loans. When the party is over, many end up owing money well into their early 30s.

Most student loan programs give new graduates from six to nine months before they have to begin paying back the debt. That helps people new in their careers find jobs and begin getting used to paying monthly expenses.

How student loans affect the ability to get credit depends. It can affect a credit rating in a negative or a positive way – depending on how well the loan is being repaid.

If it is being repaid on time, a student loan is actually establishing a good credit history. Once a person has paid a year or two on time, they may even be able to qualify for a car or other loan, even if they don’t have revolving credit accounts.

If the new graduate had trouble finding a job and was forced to be under-employed or unemployed, there could be a problem. When a student loan becomes delinquent or goes into default, credit history can be greatly affected. In some cases, professional licenses can be revoked if the debtor doesn’t pay up. Even doctors and lawyers have been known to default on student loans.

If you have missed some student loan payments, be sure to check to see if your positive repayment history is correctly reported by all three credit bureaus. If you find that it isn’t being reported correctly, ask your lender to do it.

But even when a repayment history is good, a large student loan debt may have creditors taking a long look at your debt ratio. A home or vehicle may be out of reach for quite awhile if your student loan, rent and other credit obligations are above two-thirds of your take-home salary.

Even if you’re keeping expenses down and don’t have a lot of credit obligations, if the principal balances on the student loans haven't changed much, you’ll have a harder time getting credit. Worse is if the balance is getting larger. That happens when you've taken a forbearance on the loan. Accruing interest on the forbearance adds to the outstanding balance.

Pay your student loan on time every time to build up good credit.

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