How Do Student Loans Affect My Credit Score?

Student loans can be a good or bad thing for your credit score. Because of the increasingly unaffordable price tag on higher education, many people have student loans. Student loans make a lot of sense to lenders: Although the person responsible for repayment may have no income at the time of the loan, the lender expects that good income is just around the corner.

But what really makes these loans attractive to lenders is that they can’t lose. Almost no student loans are dischargeable in bankruptcy, except in extreme situations, meaning that you have to pay them back sooner or later.

If you have a student loan, chances are that it appears on your credit report. It may be reported more than once. Why? A loan is usually for a semester’s or a year’s worth of school expenses. Each loan is reported as a separate loan for each enrollment period.

So four years’ worth of student loans add either four or eight loans to your credit report. Making payments and/or filing for benefits on time reflects a positive history on your credit report and adds to your credit score. This can be a lot of good news for your credit report!

Conversely, if you end up in default on your student loans, you’ll see a lot of negative marks on your credit report from all those individual loan entries, and your credit score will fall. Any missed payments are reported to the bureaus, and you’re subject to the full range of collection activity, just like you would be with any other loan.

If you consolidate your loans after graduation, they show up on your report as one loan. Consolidating is the process of refinancing all your individual loans into a single loan. The original loans are marked paid in full, and the interest rate for the consolidated loan is often lower and the repayment term typically longer than for the individual loans.

The net result is the convenience of a single, lower monthly payment. With a consolidated loan, you typically have a number of different repayment options, including paying the same amount each month, paying less now and more later, and basing your payments on your income.

Student loans aren’t secured with collateral in the normal sense of the word. When you default on a student loan, you can’t defer payment of the loan. In fact, you may have to pay it all at once unless you can come up with an acceptable repayment scheme.

Additionally, you’re not eligible for further student aid, your school may withhold your transcripts, state and federal income tax refunds may be used to offset the loan amounts, and your wages (when you get that job) may be garnished. Finally, if you don’t pay long enough, your Social Security benefits may be garnished.

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