Student loans represent a new wave of debt in the U.S. economy. According to the National Center for Education Statistics, the average student graduated with $33,000 of student loans in 2014.
As America’s student debt tops $1.2 trillion, individual questions arise about the best way to fund education, benefits and risks, and how student loans affect the credit ratings of newly-minted professionals.
How are student loans classified?
Like an auto loan or mortgage, student loans are classified as installment debt because they are repaid in equal amounts over a fixed period of time. While consumer credit card debt is considered “bad” due to fluctuating interest rates, compounding balances and risk potential, student loans are classified as “good debt” for a few reasons:
- These types of loans are used to build education and are therefore less volatile than consumer credit
- Student loans are repaid in fixed amounts and have a lower risk of default than revolving debt
- Interest paid on federal and private student loans is tax-deductible for most borrowers
- Student loan interest rates are usually low and fixed in the case of many federal loans
- Low volatility and fixed payments means decreased risk, a positive factor when it comes to credit scoring
When managed correctly, student loans have the ability to establish credit history, payment history, and increase credit diversity — three factors that can improve your score by up to 60%.
When are student loans reported to the credit bureaus?
Although the average student will not repay their loans until six to 12 months after graduation, education debt appears on a credit report shortly after the account is opened. The account status will appear as “deferred” until you enter the repayment period.
Do multiple student loans appear as a single debt?
While you may use a single lender for all your student loans, every instance of borrowing appears as an individual account. For example, suppose you are awarded $14,000 during freshman year and $11,000 during sophomore year. Although your debt is owed to a single lender as a single payment, you’ll see two separate accounts listed on your credit report.
What happens if my loans are sold to another company?
Company downsizing or expansion often leads to the selling of assets — including education debt. Suppose your loans are sold from Company A to Company B. Much like refinancing a mortgage, the original account (A) is listed as paid and closed while the new account (B) assumes the debt. Your credit report should not be negatively affected by the change. Lenders are required by law to notify you if your debt is being sold, and it’s wise to order copies of your credit reports within 90 days of the change to ensure that the transfer is reported correctly.