Student loans carry a certain reputation among borrowers and are seen by many as causing feelings of anxiety, mountains of debt, and delays in the ability to buy a house or participate in similar rites of passage toward becoming an adult.
But learning more about student loans and repaying them may help you dispel some of these concerns—including the effects they may have on your credit. While student loans may feel like a burden, paying them on time may actually help you establish smart credit habits early in life.
“You shouldn’t necessarily be scared of how [your student loans] will impact you,” says Matt Ribe, director of legislative affairs at the National Foundation for Credit Counseling (NFCC).
Here are some of the ways your student loans may impact your credit and what you can do to handle them responsibly.
How student loans work
A student loan, like a car loan or mortgage, operates as an installment loan, meaning that the borrower pays back a principal amount, with accumulated interest, over a certain period of time. Unlike a credit card account that you might keep open for future use, once an installment loan is paid off, the account is closed. Your student loans will affect your debt-to-income ratio—the amount of debt you carry as compared to your overall income—which, if especially high, may affect your ability to obtain new lines of credit.
“If [you] were applying for another line, that amount of outstanding debt would show up on [your] credit report and potentially impact [your] lender’s decision,” Ribe says.
This might seem like a roadblock to any future financial decisions, but since your student loan is an installment loan, it may actually have less of an impact on your score than you think. Just like a car loan or a mortgage, always making on-time payments is a crucial habit to form. Having a very high student loan balance may impact your purchasing power, but it is not necessarily a black mark on your record.
Your student loan repayment plan becomes part of your payment history, which is the biggest element considered when calculating your credit score. Knowing when your first payment is due is important, but, according to Ribe, you first need to decide which repayment plan is best for you.
“A lot of borrowers are attracted to an income-based repayment plan, but part of the challenge is the lower payment is not enough to cover the interest or make much of a dent in your balance,” he says.
The payment plan you choose will determine your minimum monthly payment, so it is important to understand what you can afford to pay and how your payments will affect your credit. Making on-time payments every month is a positive habit to get into, but if they are so low that you are unable to lower your amount owed or so high that you can’t make payments on other accounts, it may be time to identify other options.
Determine how much you need at the outset
According to Ribe, borrowers coming out of college with a higher debt-to-income ratio may have a harder time getting a good interest rate for a mortgage—or even just a credit card. But if you manage your loans with your credit in mind, you might be able to better prepare yourself for these effects.
“One of the unique attributes of student loans is borrowers will take out a new student loan every year they are in school, and they have flexibility in determining how much they will take out each year,” Ribe says.
If you can determine how much money you need for the year, you might be able to avoid taking out unnecessary loans. The less you owe, the better your spending abilities may be once you’re out of school. You can check your credit report and credit score throughout this process to stay informed as to how your loans may affect your credit.
Handling student loans responsibly
According to Ribe, the effect of student loans on your credit shouldn’t scare you from obtaining them. “But you should take into account what you’re borrowing, your anticipated repayment amounts, and your expected income so you can plan and budget,” he says.
For many borrowers, student loans can be an opportunity to not only get an education, but also prove they can pay back loans responsibly. The key is becoming informed before payments are due. Making on-time payments and paying off these loans can benefit borrowers for as long as the accounts stay on their credit reports, which may take several years.
You can finance an education before you have much of a credit history, Ribe says. But it can also be an opportunity to learn about personal finance and wellness, and connect with an expert if necessary.
Dustin Pellegrini is a senior web producer and writer at Think Glink Media, where he specializes in reporting on identity protection and credit. He studied writing and visual media at Columbia College Chicago.
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