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What are Student Loans doing to my credit?

By Rochelle Belnap, The Arizona Credit Law Group, PLLC

These days everyone seems to have student loan debt.  Aside from trying to figure out how to manage that debt it is important to know how these federal student loans are impacting your credit.

Cash & Graduation

Education has a cost.

Typically, you incur separate student loans for every semester you are in school.  Actually you have 2 student loans each semester, one subsidized and one unsubsidized.  Each of these loans is reported as individual accounts on your credit report.  This usually means that after a few years of school you have between 8 and 16 student loan accounts on your credit report!

When you consolidate your loans, you are combining all of those individual loans into one loan.  Then only that one loan appears on your credit report.  People consolidate for many reasons, but mostly they do it for the lower interest rate and more manageable monthly payment.  However, consolidation has its drawbacks.

Why does this matter?  It is important to establish good credit and student loans can either help or hurt you.   When your accounts are in good standing- meaning you pay them on time every month or they are in deferment or forbearance, then student loan debt is helping you establish good credit.  However, when you make late payments on  your student loans, then you will be reported late for every single account and this will hurt your credit score.

If you are reading this then what you really want to know is whether your student loans will hurt your ability to obtain credit based financing for a car, house, credit card, etc.  The answer is “maybe.”  There are 2 main factors:

  • Monthly Payment: Lenders will review your “debt to income” or DTI.  They review all of the monthly payments reported on your credit report and divide that number by your gross income to obtain a percentage.   They use this percentage to determine how much you can afford, and your risk of default.  (Note: “Loan to Value” or LTV for student loan debt is usually not a factor.)
  • Payment History: Lenders also want to see if you make your payments on time.  If you are current on your student loan payments, or they are in deferment or forbearance, this is good.  But it’s when you are in default (more than 6 months late) that you will have difficulty obtaining credit, unless you are in a rehabilitation program.

 Sorry for the long blog! If you want more information about credit reporting and student loans, you can always call us at 480-907-6088.

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