Student loan debt poses a burden for many graduates across the United States. The average college tuition cost can range from $9,410 to $32.410 for private schools, and in some cases, tuition costs can be upwards of $60,000. In fact, the cost of a higher education degree in the U.S. is among the highest in the world, as tuition fees in the country have risen more than 200% at four-year public institutions, and almost 130% at private colleges, between 1988 and 2018.
To help cover the cost of such steep higher educational costs, many individuals opt to take out student loans. The total student loan debt is $1.4 trillion, while the student debt accrued every second is $2,858, according to debt.org. Consumers under 30 years of age are the largest demographic of student loan borrowers, with the total amount of loans taken out within the past few years around 16.8 million, for those in this age group. Additionally, Forbes reports that there are 44.7 million total U.S. borrowers with student loan debt. Plus, there is an 11.4% student loan delinquency or default rate
Such high cases of delinquency can not only pose a financial burden for many students but can also negatively affect credit scores and chances of loan or mortgage approval.
Credit scores reflect individuals’ credit history as numeric numbers and determine creditworthiness. This number is typically based on how well an individual has managed past loans and other financial obligations, such as credit lines. The Fair Isaac Corporation or FICO and VantageScores are the two most common and popular types of credit scores.
The FICO scoring system was implemented in 1989 and scores range from 300 to 850. The average national credit score is 706, according to FICO.
The VantageScore combines the Experian, Equifax, and TransUnion credit reporting agencies and uses slightly different scoring methods and requirements from FICO, to get results.
Credit scores can be particularly important because they can impact an individual’s ability to take out loans, buy a home, and can even determine insurance premium amounts for vehicles. Despite lenders that advertise “bad credit payday loans” or “payday loans for bad credit”, consumers who apply for payday loans online or other forms of cash advances are typically required to have good creditworthiness in order to be approved.
Students can opt to take out federal or private loans. There are five general categories of federal student loans:
Direct Subsidized Loans: Students are not required to make payments for subsidized loans until they graduate. The interest rate for the 2019 to 2020 school year was 4.53%, which the government pays while a student is in school. These loans are typically awarded to those whose families make less than $50,000 a year. The maximum amount that a student can take out before graduation is $31,000, $23,000 of which can be subsidized.
Direct Unsubsidized Loans: Students are responsible for paying off the interest of their unsubsidized loans, even while in school. The interest rate for the 2019 to 2020 school year was fixed at 4.53%. These loans range from $5,500 to $12,500, and all students are eligible for them. For undergraduate students, loan amounts cannot exceed $138,500.
Parent PLUS Loans and Graduate PLUS Loans: These loans are available to both graduate students and parents of dependent undergraduate students. PLUS loans have no maximum amount that can be taken out and can be used to cover any necessary educational costs. They have a fixed interest rate of 6.08% for graduates and 7.08% for loans made to graduates and parents in 2019.
Direct Consolidation Loans: These loans combine two or more federal loans into one, with a fixed interest rate. While there is no fee to consolidate a loan, students can only do so once. Consolidation can lower monthly loan payments but in some cases, can extend the time it takes to pay off a loan.
Students can also opt for private education loans. These loans are similar to personal or installment loans in that eligibility and interest rates depend on an applicant's credit score and history. Private loans typically carry higher interest rates than federal education loans.
Once a student graduates or leaves school through other circumstances, federal loans enter into the period of repayment. For federal loans, there is a six-month grace period that is given to students, before they must begin loan repayment.
Once a loan is in this repayment period, loan servicers typically automatically place the student borrower on the Standard Repayment Plan. Borrowers can opt for a different plan at any time. Students can access their account on the loan servicer’s site, which will typically state when the first payment is due, as well as the amount due to each payment. Additionally, borrowers that opt for electronic communication will receive reminders regarding their loan payments from their servicer via email.
Borrowers can make payments electronically, through a checking or savings account, or via postal mail. Students can also opt to make more than their minimum payment required each month. This can reduce interest rates and can reduce the total cost of the loan in the long-run.
In some specific situations, student borrowers may be able to get their loans canceled, forgiven, or discharged. Individuals can contact their loan servicers regarding any of the above-mentioned options to see if they are eligible.
While federal student loans do not require a credit score, these loans can have major impacts on a student’s creditworthiness. Late payments and delinquency on student loans can negatively impact an individual’s credit score. For federal student loans, loan servicers will wait at least 90 days before a late payment is reported, and for private loans, 30 days. Lenders will also typically charge late fees when an individual misses a payment. Once late payments are reported, they stay on an individual's credit report for seven years.
Consumers should note that the longer a student loan payment is overdue, the more detrimental it can be to their credit score. Further, federal loans typically go into default when a payment is not made for 270 days.
Making regular on-time student loan payments will have positive impacts on an individual's credit score and can help to build the credit score. This can be particularly beneficial for individuals who have few other credit lines, as positive student loan payments help an individual’s credit mix.
Loans that are cosigned affect both signers’ credit scores.
Debt-to-income (DTI) ratio is the amount of an individual’s income that has to go towards debt repayment. This means that the higher the amount an individual has to pay back, the higher the debt-to-income ratio is.
DTI can determine if an individual qualifies for loans, credit lines, mortgages, and other financial products. Those who have high DTI’s may have trouble securing these aforementioned options.
Student loans can become financial burdens on students and recent graduates. But there are steps that can be taken to ease such strains:
Opt for an income-based repayment plan: Such plans are based on a borrower’s income, which can make loan payments more manageable and prevent late payments. With more financial bandwidth, borrowers can have more monetary freedom to invest and save.
Refinance loans: Refinancing a loan means taking out a new loan to pay off one or more current loans. This can lower a borrower’s interest rate and reduce the amount required to be paid monthly. This can also lower the risk of overdue payments, which can prevent negative effects on a borrower’s credit score.
Set up autopay: Setting up automatic payments can ensure that borrowers don’t miss due loan payments and can prevent delinquencies. Some lenders provide discounts on interest rates for borrowers who opt for autopay.
Limit the number of loans: Experts advise that borrowers minimize the number of student loans they take out in order to prevent negative impacts on credit score. Having multiple loans can trap borrowers in unsustainable cycles of debt. Students can look into grants and scholarships that can help to lower the cost of school.