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The Impact of Student Loans on Your Credit

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As the cost of education continues to increase at accelerated rates, more and more students are seeking loans to finance college degrees. According to The New York Times, two-thirds of bachelor’s degree recipients graduated with debt in 2008, compared with less than half in 1993. In 2010, graduates who took out loans left college with an average of $24,000 in debt. At the same time, given federal and state-level budget cuts, more and more people are turning to private lending as a source for their student loans.

As such, it is important that your credit (and your parents’ credit, if you require a co-signer) is in tip-top shape if you plan to use student loans to finance your tuition.  Likewise, it’s important to recognize how credit scores take into account student loan obligations. Private lenders will likely pull a credit report and credit score (on you and any co-signers) as part of the application process and use this information in their credit granting decision process.

The good news for student loan applicants is that student loan inquiries generally fall within the special rate shopping inquiry logic built into credit scoring models.  This means you can shop for the best deal on your student loan without the added worry of damaging your credit scores with multiple inquiries for credit. This doesn’t work for all inquiries, though—only those related to student loans, mortgages or auto loans.

[Resource: How Credit Inquiries Affect Your Credit Score]

Once your student loan has been approved, the lender will report it to the credit bureau—often times with a deferred status indicating payments are deferred until the student graduates.  A lot of people assume that a deferred student loan is bypassed or treated differently by the credit score because of the deferred status.

This simply isn’t true.  Most credit scores do not treat student loans any differently than other credit obligations reported in your credit report.  This means that the student loan information will factor into credit attributes that evaluate payment history, the length of credit history and level of indebtedness, etc. Make sure to pay your student loan obligation as agreed once the deferred status has been lifted. Not doing so will negatively impact your credit score.

[Related article: Student Loan Default Realities]

Image: gadgetdude, via Flickr

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