Student Loan Debt: The Ripple Effect on Credit

It’s no secret that the cost of getting a college education can be downright frightening with the total four-year tuition and living expenses costing more than a new home, in some cases.

While many families have worked hard to save money in anticipation of this expense, the fees have become so high that many parents and students are taking on more and more debt to cover the investment of a secondary education.

Recent findings by the Pew Research Center found that 22.4 million households, or 19 percent, had college debt in 2010. That is double the share in 1989, and up from 15 percent in 2007, just prior to the recession. In addition, consumers have a greater amount of student loan debt today compared to seven years ago according to a FICO study. In 2012, the average student loan debt was $26,500 — a 54% increase over the average of $17,200 in 2005, and they estimate approximately 1 million more consumers today have more than $100,000 in student loan debts.

What Impact Does This Have on Credit Scores?

Paying student loans on time is important as reported student loan delinquencies can have a negative impact on score. Note, some consumers mistakenly assume that missing payments on government backed (as compared to private) are considered differently by the score and won’t hurt your score. That is simply not true — if reported, the score will consider this missing payment information.

Student loan information reported with a deferred status will still be considered by the score (the fact that the loan is reported with a deferred status is not considered negative or positive by the score).

Student loans are typically reported as an installment type loan (where there is a fixed monthly payment for the term of the loan). As such, while student loan balances may factor into the scores they will typically have less effect compared to carrying revolving balances (such as balances on credit cards).

In general, you should think of a student loan like any other credit obligation and pay it on time as agreed as a means to keeping your credit score in good standing. You worked hard to get that degree and need to be just as diligent in paying off those student loans to increase your access to affordable credit.

Image: James Collins, via Flickr