Keeping credit healthy while paying off student loans
Millions of young adults across the country carry student loans, and total education debt recently surpassed $1 trillion nationally. As individuals struggle to pay down their balances, while also tackling life events – such as marriage, parenthood and homeownership – many are concerned about keeping their credit scores intact. Heavy student loan burdens don’t have to have a negative impact on a person’s score if they manage their repayments wisely.
First, it’s important to understand how loans impact credit. Because these balances are paid over time and typically require the borrower to make fixed monthly payments, they are classified as non-revolving debt, or installment loans. Unlike revolving balances, such as credit cards, installment loans are not factored into a person's credit utilization ratio. Credit utilization – the ratio of total revolving balances to total available credit – makes up 30 percent of an individual’s credit standing and can significantly lower scores if balances are too high.
While carrying a high student loan balance may not in and of itself negatively impact a person’s credit scores, failing to make timely payments will. Like other types of loans, such as mortgages and auto financing, education debt is listed on credit reports. The way in which borrowers manage this debt also influences their credit scores. Therefore, it’s crucial for borrowers to make each payment in full and on time to avoid falling into delinquency and ruining their credit. In addition, those with federal student loans have another aspect to consider. The federal government is authorized to request payment in full if borrowers fall into default. In addition, it may garnish wages, seize tax refunds and take legal action to secure the remaining balance.
Instituting a responsible repayment plan
Individuals who borrow money for college should develop a money management plan that enables them to effectively pay off their debt without stretching themselves too thin or risking falling behind on payments. Federally-backed loans offer a number of repayment options, ranging from standard and extended to income-contingent plans. The program a person chooses impacts the amount of their monthly payment and the length of their obligation. Consumers should keep in mind that while choosing an extended plan may lower the amount of their monthly payment, they will pay more in interest over the life of the loan. However, if this option helps keep payments reasonable, it may be the best option for borrowers.