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.

Giving loans is risky business. So is taking them. Pre-Scientology Tom Cruise knows.

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!

6 thoughts on “How Do Student Loans Affect Your Credit Score?”

  1. Thanks for this entry, it was very helpful. I am majoring in Veterinary Technology and Pre-Veterinary Medicine. Obviously, if I don’t get into vet school (which is a Heruculean feat!), keeping my undergrad debt to a minimum is essential, as vet techs typically make only $22-$32K/year. Between federal aid and institutional scholarships (and commuting instead of living on campus), I am able to pay my tuition bill while only taking out about $2500-$3500/year in Stafford loans (subsidized, of course!). My ultimate goal is definitely to get my DVM, but this involves taking on $150-$200K in debt. I have read up a bit on grad school loans, and I know the max amount of money you can borrow from the government is obviously much higher. Unfortunately, it still wont be enough to bridge the gap. My parents are in absolutely dire straits in the money department and will be lucky to be able to keep themselves afloat. Needless to say, I won’t be getting any financial help from my family for grad school. As a veterinarian, I won’t be making truck-loads of money, but definitely enough to substantiate taking the loans. My big question is, what is the best way to bridge the gap between federal loans and my remaining expenses? With the salary I would make as a vet tech, working for a few years and saving money for grad school isn’t really an option unless I live under a bridge during that time! How do I navigate the private loan process, and what other options do I have? As a full-time grad student in an **extremely** demanding program, I really don’t think that working part time while going to school will even be an option. Help!

    1. Judge Josh,

      My daughter is in an identical situation as Carla, and we are waiting for your reply to see how to handle her financial crunch.

      Thank you so much for the help you give everyone here.

  2. I have those big 6 digit loan amounts, which will be coming due when I graduate in December. Any advice on the best course of action if I can’t pay the monthly amount?

  3. Hey everyone how’s it going?

    First let me just say, Vicki, congrats on being accepted to your school of choice. I wish you all the best as you move forward in your endeavors.

    Josh pretty much said it all. I don’t really have any scary school loan stories, but one thing worth mentioning – don’t be afraid to talk to lenders. Weather they are the lenders of your school loan, or lenders for your car loan, or any type of agency that has given you money on credit… if you find yourself in a bind, CALL them and talk to them, you’ll be surprised at how much they are willing to work with you to help you in whatever situation you find yourself in.

    I will admit, that I was one of those that ascribed to the idea of scary credit collectors just waiting to bite my head off for one late payment. But overall, my experience with credit collectors has been positive as long as I call the agency and talk with them to let them know what’s going on, if indeed I find myself in a situation where a payment may be late.

    This was a big deal for me after college because even though I had attained my degree, I still found myself in limbo, stuck between trying to find a job, or getting into a program for my Master’s Degree. A simple phone call and a brief conversation to the lender allowed us to come to a mutually satisfactory agreement on repayment…. and this saved me the headache I would have experienced had I chosen to ignore the notices and believe that the loan would magically take care of itself.

    Stay in regular contact with a lending agency. Even if you can’t make a payment, at the very least, they would like to see that you have honorable intentions and that you are trying to take care of your responsibilities.

    Just some food for thought.
    Good luck to all this coming semester.

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