How College Student Debt Affects Credit Scores
As the cost of education has drastically risen over the years, so has the reliance on student debt to help finance such expenses. The concern is that more and more students are graduating from college with large amounts of student debt and with no job intact.
The Fair Credit Reporting Act (FCRA) recognizes student debt as any other type of debt, equal to mortgage debt, auto loans, and credit card balances. Student loans can affect credit both positively and negatively. Since student loans have long repayment periods, consistent and timely payments can assist in building and increasing credit scores. Having a mix of debt, such as a credit card, a car loan, and student loans can reflect positively as a broad mix of debt. Conversely, late payments and delinquencies on student debt can negatively impact credit scores and payment history.
Some parents and counselors are encouraging students to avoid excess student loans and to focus on applying for grants and scholarships instead. What is happening too much of student debt taken out is that parents and grandparents end up helping students make their debt payment. Data does show that some college graduates end up carrying student loans well into their 30s, 40s, and 50s, burdening already strained finances and household expenses. Also, what many do not realize is that such debt is only rarely not dismissed in Bankruptcy, meaning it stays with you.
Student loan debt is now the second highest consumer debt held after mortgage debt, and higher than both credit cards and auto loans as tracked by the Federal Reserve. There are over 44 million borrowers nationwide of student loans, with an average balance owed of roughly $37,000. Student loans are held across a broad spectrum of the public, including all demographics and age groups in every state.
Of growing concern are the amount of student loan delinquencies, which surpassed 10% of all student loans in 2018, with $31 billion in a serious delinquency status. Federal Reserve data reveals that the majority of borrowers have a loan balance of between $10,000 and $25,000, with 30-39-year-olds holding most of the outstanding debt.
As a result, it is important to also evaluate these potential impacts as well when developing the best strategy for your situation; which is an area that I have assisted other clients.
Sources: Federal Reserve Bank of St. Louis