The effect of student loan debt on your credit report

A little something I wrote a couple of years ago for the University of Phoenix website:

For many students, a student loan will be the largest debt that they have incurred to date. In some cases, it may also be the first large loan that has been undertaken. Just like a car loan or credit card, the way that one maintains a student loan will have a direct effect on his credit score. Since the credit score is a determinant of future buying power for larger purchases such as a house, it is important to know how to manage a student loan so that it will not have a negative effect on one’s credit score.

            There are several things which are beneficial for the borrowing student to know. Being aware of these facts can make the difference between the student loan making a positive or negative effect on a credit report.

Fact 1 – The student loan begins immediately

            There is a misconception that the student loan does not appear on a credit report until the payments are due. The payments usually begin after the completion of school, followed by a 6-12 month grade period.

            However, the student loan may appear on a credit report soon after the initial papers are signed. Usually it is listed as being in “deferred” status.

Fact 2 – The repayment of student loans can begin at any time

            As mentioned, most lenders do not require the initial payment on a loan until the student has completed studies. However, interest will continue to accrue during this time.  A student is allowed to begin making payments at any time. One recommendation to keeping a credit score moving up is to work at paying the interest on the loan while in school. This will accomplish two things which are beneficial to maintaining good credit. First, it helps to keep the loan balance lower than if the payments were not made. Second, making timely payments is beneficial to one’s credit score, particularly for a student with a brief credit history.

Fact 3 – Paying off early can save thousands of dollars, but may not benefit your credit score

            Many student loans are set with a 10-year repayment plan. The student borrower can save a great deal of money by paying more than the monthly payment. Adding an extra $50 or $100 to each payment can shorten the length of the loan.

            However, there is no guarantee that engaging in this practice will be a great benefit to one’s credit score. The best way to improve a credit score is to make regular, timely payments.

Fact 4 – Defaulting on a student loan can cause multiple negative entries on your credit report

            There is never a benefit to defaulting on a student loan. In fact, defaulting can cause more than one negative entry on a credit report. The first negative entry will be for the original loan, while other entries can be added for failing to pay any collection agencies which have been hired to service the debt. Failing to pay or allowing the loan to fall into default status can result in severe consequences including, but not limited to, wage garnishment, state or federal payment offset, and additional collection fees.

            In the event of potential default, the best recommendation for a borrower is to maintain contact with the lender. In some cases, there may be options available, such as a deferment.

            The best way to stay on top of student loan status is to regularly check one’s credit report. By law, each consumer is allowed to request one free credit report per year.