Credit 101

How Student Loan Debt Can (Gasp!) Help Your Credit

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There’s an understandable backlash against student loan debt, which these days is often paired with words like “bubble,” “epidemic,” or “crisis.” Yes, for some students today, this debt is completely crushing their homes and dreams for the future and something’s got to give.

On the other hand, there are plenty of students who graduate with manageable student loan debt. An NPR infographic  makes the case that “the rise in total student debt is not primarily the result of each student borrowing more money. It’s the result of more students going to college.” It goes on to bolster that argument by showing that the average debt per graduate of a four-year degree program isn’t rising as quickly as total student loan debt.

Notably, however, there is a significant difference in the average debt for students who get their bachelor’s degree from a public college ($12,300 for the 2009-2010 school  year) versus those who graduate from a private school ($18,300). And debt incurred to earn an advanced or professional degree can make those balances look miniscule.

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Free Tool: Credit Report CardPersonally, I’d like to see each and every student who can successfully earn a college degree do so without a penny of debt. But until that utopian dream is achieved, it is worth noting that there are ways that student loan debt can still fall in the “good debt” category.

Student loan debt can help build your credit rating. When you pay your student loans on time, they provide a valuable credit reference. Your credit report isn’t created until you borrow money and the lender reports that account activity to the credit reporting agencies. What about the fact that students may have large balances? While lenders will take your monthly payments or your debt-to-income ratios when determining if you can afford the loan, when it comes to your credit scores, as long as you make your payments on time, your credit should benefit.

If you take on more debt than you can afford to pay back, you’ll end up with late payments on your credit reports. Even worse, you could default, which will really do a number on your credit scores. Your payment history is one major component of your credit score. If you want to monitor your credit, you can get your Credit Report Card, which gives you a truly free credit score and gives you a grade for each of the major components of your credit score so you know what to do to improve it.

[Related Article: For Middle-Age Students, Is College Worth the Risk?]

Student loan debt can be flexible. If you run into financial problems and can’t make your payments on your mortgage, car loan or credit card, you’re pretty much stuck. You’ll fall behind and your credit will take a hit. With certain student loans, however, you may be able to enter into deferment or forbearance, or participate in the Income-Based Repayment Program. In fact, there are no other types of consumer debts that offer such flexible repayment options. These programs can reduce your payments to as little as zero, and participation does not hurt your credit scores. Keep in mind, though, that with deferment or forbearance your balances may get larger, rather than smaller.

Student loan debt can help you leverage your greatest asset: yourself. As Liz Weston points out, the gap in earning power between college grads and non-grads is widening. She notes, “After factoring in the costs of college and earnings forgone during those years, the typical college graduate earns $550,000 more than the typical high school graduate over a lifetime, according to a Pew Research analysis of census data.” If students don’t complete their degree, choose a degree in a field they later abandon, or pay too much for a degree in a field where salaries are low, then student loans are clearly bad debt. But for those who choose carefully, and keep debt to a minimum, it may be the best debt they take on.

[Free Resource: Check your credit score and report card for free with Credit.com]

Image: Kiaura, via Flickr

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