Posted by The TaxAdvocate Group, LLC

This is How Your Student Loans Affect Your Credit Score

This is How Your Student Loans Affect Your Credit Score

Student loan debt has become an enormous problem for loan-saddled borrowers and it's easy to see why. According to a recent analysis by, not only does the average college graduate with student debt leave school with $31,172 in balances, but the overall student loan debt has now reached $1.52 trillion nationally. The average debt borrower often makes an average monthly payment of $393 for at least ten years, making saving for the future, buying a home, or spending more difficult for them to retire one day.

Even more alarming is the fact that 19 percent of those with student loan debt are behind their payments and heading towards default, according to a report from the Federal Reserve. It means that one in five people struggle to make payments on time and at risk to let their finances spin out of control.

While a number of factors come into play, making it harder for debtors to repay their loans, one thing is for sure — the student debt bubble we're in at the moment may get much worse before it gets better.

The upsides of debt for student loans

Nonetheless, it is important to note that for your credit score, having student loan debt is not automatically a death knell. In reality, Tayne Law's financial advisor Leslie Tayne says that having student debt in the right circumstances could even boost your credit score.

Your payment history is the biggest contributing factor to your credit score -- weighing in at 35% of your score makeup, and that includes your history of the student loan payment, says Tayne. There will be a negative impact on your credit score if you miss payments, pay late or go into default on your student loans. But the opposite is also true.

The financial attorney said you will appear like a credit risk if you have a shoddy payment history but it can have a positive impact on your score if your student loan payment is always on time.

Yet your payment history is not the only place where student loans may leave you on the long haul with better credit. Tayne says that another place where student loans will actually help your score is the mix of credit you have on your report. A good mix of credit involves a variety of recurring credit accounts such as credit cards and installment loans. Because student loans are installment loans, they can improve your credit mix and add more depth to your credit profile.

Remember also that obtaining a student loan has an effect on your credit rating, Tayne says. He also said that it is better for you to have a positive credit history for as long as possible. Since student loans come with regular repayment plans that last 10 years and many borrowers opt for longer repayment plans or even income-driven repayment plans that last 20 to 25 years, this is another place where student loan debt can work for you.

When student debt can destroy your credit score

The real risk student loans at the end of the day only come into play for your credit score if you wind up with repayment issues. To begin with, making your student loan payment late each month will have an immediate negative impact on your credit score, just like paying a credit card bill or your mortgage late in any given month.

The stakes are only going up from there.

Tayne said if you default on your student loans, the debt will go to collections and whenever this happens, it is immediately reported to the three credit offices, the Experian, Equifax, and TransUnion.

Your debt shows on your credit report at that stage as debt is in collections, affecting your score more. And as long as these debts remain unresolved, there will inevitably be more damage.

There are several steps you can take to get back on track if your student loan debt hurts your credit score because you keep making late payments or your debt is still in default.

For example, if you have federal student loans, you can apply for repayment of loans — a program that allows you to catch up with nine monthly payments over ten months on student loans. During this time, the payments you make will be based on your income, so you can pay less than usual and still "catch up" to get out of default on your student loans.

You can also combine federal student loans with a direct consolidation loan. You will need to commit to terms on an income-driven repayment plan or make three consecutive on-time payments on your loan before going forward to merge loans that are already in default with this type of loan.

Like other bills that you have, student loans can only affect your financial health if you let them. Your best bet is to consider all the repayment options open to you and take steps to ensure that your monthly payment is manageable and easy to handle. When you stay long enough on top of your monthly payments, your debt will eventually disappear.

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