It’s easy to lament about student loan debt. Interest eats away at your hard-earned dollars and the payments can seriously cut into your monthly budget. But student loans aren’t all bad news — they can help build your credit. If you’re curious about strategies for building good credit, learn how to use your student loans to your advantage.
Credit affects your ability to borrow in the future (hello, mortgage!) and navigate adult life easily. Your credit score, which is a numeric value that represents your creditworthiness, is used in a variety of life situations. Looking to buy a home or car? Your credit will be checked. Need to move into your own apartment? Better have good credit. In some cases, your credit is a factor in employment decisions, too. “Many jobs check your credit history to see if you are responsible with your finances or are having any financial issues. It may be another factor in who gets the job,” said Peter J. Creedon, a CFP with Crystal Brook Advisors. If you have poor credit, or no credit history at all, accomplishing basic goals like renting an apartment or getting approved for a credit card can be difficult. Plus, having good credit can help you get approved for better interest rates on student loan refinancing, credit cards, and more.
Student loans are installment loans, which differ from revolving credit lines such as a credit card or HELOC. Installment loans are provided once, then paid back over a set period of time in regular installments. Installment loans affect your credit profile, but how it affects it depends on you. It doesn’t matter if you have federal or private student loans — what matters is that you are responsible with your debt and make on-time payments. Jason Reiman, CFP at GetFinFit.com, explained, “When it comes to credit, and thus, building a positive record and credit score, time and consistency are two of the most important factors. Thus, student loans play a significant part in building good credit.” Being in good standing with your student loans can help build good credit even if you don’t have a credit card or any other loans. I know this first hand. I was credit-averse and didn’t get my first credit card until age 28. But I did have student loan debt and always made on-time payments. By borrowing for my education (which I had to do) and paying back my loans on time each month, my credit score was 720 — enough to get approved for my first apartment.
If you have student loans, there are a few things you can do to ensure your loans help build good credit and don’t tarnish your credit profile.
1. Make payments 100 percent on time.
Your payment history is a huge factor when it comes to building good credit. Creditors look at your payment history to determine if you are creditworthy — your past is an indicator of the future and if you have missed or late payments, it will affect your credit negatively. “Payment history makes up the largest share of the credit score algorithm – 35 percent,” said Mary Monroy, a student loan counselor at ClearPoint Credit Counseling Solutions. “Student loan borrowers can use their loans to their advantage to build good credit by ensuring that payments are made on time once they go into repayment.” Your FICO credit score, which is a commonly used score, is determined by a variety of factors in addition to payment history. Also considered are amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent) and credit mix (10 percent). So while payment history isn’t the only thing that affects your credit score, it is the largest determining factor. To help keep your payments on track, consider signing up for autopay through your loan servicer, which allows you to automatically deduct payments from your bank account each month. “Many servicers will offer an incentive to borrowers of a .25% interest rate discount if ACH payment method is chosen,” said Monroy. If you don’t think that’s the right option for you, sign up for online reminders or put a notification in your calendar a few days before the due date.
2. Make your payments affordable.
If your payments are overwhelming and you struggle to make them each month, you may skip a payment because you can’t afford it. But remember, rule number one: always make on-time payments. So what can you do? “If you have private loans, see if you can qualify for a lower fixed rate,” recommended Andrew McFadden, Founder of Panoramic Financial Advice. “If you have federal loans, there is a good chance that you can qualify for income-based repayment if your loans are substantial compared to your income.”
3. If you can’t make payments, contact your loan servicer immediately.
If you really can’t afford your student loan payments, talk to your loan servicer immediately and see what options are available. Don’t wait. You may be eligible for an income-driven repayment plan or deferment until you get back on your feet. Having student loans can play a positive role in building good credit, so long as you make on-time payments and keep them under control. Doing so can help you in other areas of your life — with good credit, you may be eligible for student loan refinancing, lower interest rates and more. In the end, being a responsible student loan borrower can lead to other opportunities that can boost your finances.
You usually do not have to start repaying your loans right away. This “waiting period” after graduation and before repayment begins is known as a “grace period.”
Grace periods can be extended for up to three years (in addition to the standard six months) if a borrower is serving on active duty in the Armed Forces. Repayment begins after the grace period is over. You can only use the grace period once per loan, so if you go back to school after your grace period ends, that loan will not be eligible for a second grace period upon graduation from the subsequent program. New loans will be eligible for a grace period. See the programs for military section of this site for information about other options for military service members and certain civilians affected by war or national emergencies.
Be advised that you lose any remaining grace period if you consolidate your loans. Also be advised that there is not a second grace period if you already used up your original one. For example, if you have an in-school deferment on a loan that entered repayment at an earlier date (before you returned to school) and you graduate, drop below half-time enrollment or withdraw, you will be required to begin making payments right away on the loan because the original six month grace period was already used up.
You have six months to begin repayment on Stafford loans after graduation, or after you leave school or drop below half-time enrollment. Older Stafford Loans may have a longer grace period. Interest will not accrue while you are in school, and during the grace period for subsidized Stafford loans. The government pays the interest on these loans. This is not the case for unsubsidized loans. If you have unsubsidized loans, you may either pay the interest during the in-school deferment and grace periods, or the interest will be capitalized when repayment begins. Be advised that this grace period “interest subsidy” was eliminated for Direct subsidized loans made on or after July 1, 2012 and before July 1, 2014. If interest is accruing on your loans during the grace period, you should consider making payments to cover interest. This will help you avoid unnecessary interest capitalization. “Capitalization” is when interest that accrued during the grace period or other deferment is added to the loan principal when repayment begins. Making payments during a grace period is not required, but something to think about if you can afford it. For loans made for periods of enrollment beginning on or after July 1, 2012, graduate and professional students will no longer be eligible to receive subsidized loans. Loans made prior to this date are not affected by this change.
There is no grace period for PLUS loans. Repayment on PLUS Loans generally must begin within sixty days after the final loan disbursement for the period of enrollment for which the loan was borrowed. However, deferments are available for PLUS loans disbursed on or after July 1, 2008. These graduate and professional student PLUS borrowers may defer repayment during the six months after they leave school. The additional six months will automatically be applied when the graduate PLUS borrower requests an in-school deferment. A parent borrower with loans disbursed on or after July 1, 2008 may defer repayment while the student on whose behalf the loan was taken out is in school. Parent PLUS borrowers may also defer repayment for six months after the student on whose behalf the loan was borrowed is no longer in school or if the parent is also a student, six months after the day that the parent is no longer in school. Parent PLUS borrowers must apply for this deferment. Because PLUS loans are unsubsidized, interest will accrue during the deferment period.
The grace period for Perkins loans is nine months. Perkins loan borrowers attending less than half-time should check with their financial aid administrators to determine their grace periods. Perkins borrowers should not be charged interest during the grace period.
Private loans may also have grace periods. These are sometimes called “interim periods”. You should read your loan agreement carefully and ask your lender about when repayment begins. Interest will generally accrue while you are in the grace period. Once you enter repayment, the accrued interest will usually be capitalized, meaning that it will be added to your principal balance. You can also choose to pay the interest during the grace period and avoid capitalization.
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Reform Alliance LLC is a private organization and is not a government entity. Reform Alliance LLC is a Document Preparation, Submission and Tracking Service. Reform Alliance LLC will not pay your student loans for you or on your behalf. We offer our service only for the Preparation, Submission and Tracking of Federal Student Loan Consolidation Documents. Document Preparation Services are not available for some residents of the following states, IL, CT, WA. *Results May Vary and are Solely Based on The Federal Consolidation Program You Choose. Not available in all States.
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