The Effect of Student Loans on Your Credit Score

by Scott Sery on May 21, 2012

One of the most useful financial tools a person can have is the student loan.  They can be an exceptional way to get an education, and they are often the cheapest loan (as in the lowest interest rates) a person will ever get.  They are long term loans that can help to build a person’s credit and make it easier in the future to obtain more credit.   But when they are used improperly, they can be a nightmare.  The borrower can get in over his or her head easily, and missed payments can have a huge effect on the credit score.

Even though I have mentioned in the past that there are several high paying jobs with no college degree needed, getting a college education is still quite the leg-up in today’s society.  It allows the borrower to earn vastly more during his or her career; going on to obtain a graduate degree can be even more useful.  Taking the worry out of studying and working can make a dramatic difference in the student’s grades.

When the loans are used improperly, however, it can lead to many problems down the road.  Since these loans are unsecured, the student will always owe on them, even if he or she declares bankruptcy.  When a person finds they are having difficulty making their payments, there are many options rather than just skipping the payments.

Student loans can be a great way for the new graduate to build their credit score.  Since a good portion of the score is based on their credit history, these loans will most likely go back to when they turned 18 and were first able to start using credit.  By maintaining a good payment history, even during school when they pay on their non-deferred loans, they will begin to build their credit score.  On the other hand, when this debt is used carelessly, the credit score can be severely damaged.  Even missing one payment can cause a serious drop.  What this means is that after the student graduates, they will have difficulty buying a house, buying a car, and in some cases getting a job.  If the loans go unpaid for too long, the student’s wages can be garnished, and their tax returns seized.

The bottom line is that the student should be well aware of how the student loans work.  They are not complicated loans, but when a check for several thousand dollars is handed to them, they can get a little carried away.  By only borrowing what they need, and making sure to still live frugally, the student can get a tremendous boost in the job market.  When they are careless with this “free” money, they can end up damaging their earning abilities for years to come.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website ScottSery.com

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