Student loans are a common side effect of attending college, with nearly 45 million borrowers carrying some amount of educational debt. If you have student loans, you're no doubt aware that they can be a strain on your limited financial resources. But from a credit score perspective, they can actually be quite a big help -- provided you manage them wisely and keep up with your loan payments.
What goes into your credit score?
There are several factors that come together to calculate your credit score: payment history, credit utilization, length of credit history, credit mix, and new credit accounts. Of these, your payment history carries the most weight, and it speaks to your tendency to pay your bills on time as you're supposed to. A solid payment history leads lenders to believe that you're a responsible borrower who can be trusted to make good on his or her financial obligations. And student debt can actually contribute to your payment history in a positive way.
If you make your student loan payments when you're supposed to, that information will get reported to the credit bureaus -- Experian, Equifax, and TransUnion -- and you'll be rewarded for it with a nice boost in your credit score. Furthermore, since student loans tend to have a lengthy repayment period, keeping up with your payments could help from a credit history standpoint as well.
Don't let student loans hurt your credit
Of course, there's a flipside to all of this: If you fall behind on your student loan payments, you'll risk hurting your credit score, so it's imperative that you don't let that happen. Thankfully, there are steps you can take to avoid that scenario if you start struggling with your payments.
If you took out federal loans for college and are having a difficult time keeping up, see if you qualify for an income-driven repayment plan. Under one of these plans, your monthly loan payments will be recalculated based on a reasonable percentage of your income, which will likely be a smaller amount than you're currently stuck paying.
Another option is to see if you qualify for loan deferment or forbearance. Both options allow you to pause your loan payments for a period of time, which could help preserve your credit score if you lose your job or encounter another financial hardship that makes it impossible for you to keep up with your student debt.
If you took out private loans for college, you may have a harder time getting a break on your monthly payments, but that doesn't mean you shouldn't try. Though official programs like income-driven repayment plans, deferment, and forbearance don't exist with private loans, many private lenders have their own version of them. In other words, private lenders don't have to help you out when you start struggling, but it's in their best interest to be as flexible as possible to ensure that they get repaid.
If your private lender isn't willing to negotiate the repayment terms of your loans to make them more manageable, you can look into refinancing your student debt instead. If you're able to swap your existing private loan for a new one with a lower interest rate, you'll lower your monthly payments, thereby lowering your risk of falling behind and hurting your credit.
It's all about how you manage your debt
Graduating college with debt may not be ideal, but it's fairly common. If you manage your loans wisely, you can actually help your credit score improve, and once that happens, it'll become easier and less expensive to borrow money when you need to. But if you fail to keep up with your loan payments, your credit score could easily tank, so it pays to do everything in your power to prevent that from happening.