How Do Student Loans Affect Your Credit Score?

Welcome back, everyone! I guess it’s more appropriate to say welcome back to myself, since I’m the one who took off for a week on a family vacation to Wisconsin Dells, WI. Five days in an outdoor water park left me rested and ready to attack the fresh pile of your questions that accumulated. It also left me acutely aware of how badly I need to get back into the gym before taking my shirt off in public for hours at a time.

We’ll start with a very basic one to ease my way back in, in case parts of my brain are still on vacation. Vicki knows that big student loans are coming her way if she wants to be an architect. But how will those loans affect her credit?

Hello everyone. In a few mores day, I will be a freshman at a private college.

Fly, little bird, fly! 🙂

My mom is not that rich to afford my tuition. Needless to say, we have to take out a big amount of loan. I don’t mind to have $100000 loan at the end of my college because I truly believe college is a good investment.

I do, too. I also believe that you should do whatever you can to keep your total student loan debt well south of that $100,000 figure if at all possible.

However, I read on a website that big amount of debt WILL affect my credit history. Could you tell me how serious loan can affect my credit?

Sure. First of all, remember that the most important thing to do is to make your payments on time, each and every month. The reason you have a credit score is so that Big Business can have some idea about how good you are at repaying your debts. The fact that you regularly make on-time payments is much more important than the amount of debt itself.

That’s not to say the amount of debt you have isn’t a factor, because it is. In the future, if/when you’re looking to buy a house, mortgage lenders will look at something called your “debt-to-income ratio,” which is exactly what it sounds like — it compares the money you owe to the money you make. If that number is too high (i.e., you owe too much money for a person at your salary level), then you can have trouble getting a loan (or at least the most attractive loan).

Basically, any time someone pulls your credit history, they’re checking you out to see whether you a) have enough money to make the payments on whatever it is you’re trying to buy, and b) have enough discipline to actually make those payments when they come due every month.

Let’s say you have $100,000 in student loans. That’s fine, as long as you’re making the payments and can still afford to make the payments on the new Chevy Volt you’re trying to lease or the Kenmore washer and dryer set you’re trying to buy, or whatever.

Summary: Make your payments on time, every month — for student loans AND credit cards and everything else for which you’ve been given a line of credit — and your credit score should be fine.

How much debt I should limit to as an architecture student?

I couldn’t tell you that for sure because I don’t know exactly what your salary prospects are — that varies too greatly based upon the profession, what you want to do when you go to work, and how good of a student/architect you are. But my general rule is to evaluate your education as you would any other investment, because this is probably the biggest one you’ll ever make. Ask yourself these two questions:

1) Will the amount of money I make over my career with this degree be greater than the money I’ll pay back to the government in student loans? In most cases, the answer here is yes, I think. For example, if you have to take out $50,000 in student loans to get a job that pays you $15,000 MORE than you would make without the degree, and you work for 20 years, then that’s $300,000 more you’ll make vs. the $70,000 or so you’ll be paying back on those loans (don’t forget the interest).

But don’t forget the second question:

2) Until that greater income arrives, will I be able to hang in there and make the student loan payments without starving to death or turning tricks under a bridge? This is the big one for a lot of students. As an example, I’ll pick on art students, since you art folks are always pretty good natured about being my debt-vs-income examples.

Let’s say you go to an art school and rack up $100,000 in debt. Over 25 years, let’s also assume that you’ll sell triple that amount in works of your chosen medium of art. Paintings, let’s say. So that satisfies the first criterion above.

But what about the payments? On $100,000, you’ll be paying nearly $1,200 per month in student loan payments. Can you hang in there and survive all your normal living expenses, plus supplies, plus another $1,200? For a lot of people, the answer may be no.

So you have to weigh those two things when you’re choosing how much student loan debt to incur.

Thank you Judge Josh so much!

You’re very welcome, and good luck to you in college. The first year of college is pretty exciting, scary and liberating all at once, so for those of you who are days away from that moment, try to take it easy and enjoy it without stressing out too much.

Anyone got any credit-score horror stories related to student loans? If so, let us know about them (or anything else) in the comments below.

Good to be back. See you all tomorrow!