Will My Student Loans Affect My Credit Score?
There seems to be two (2) big debates that have been making the rounds, and actually been debatable for some time now:
* The difference between good debt and bad debt.
* Are student loans worth the cost in terms of being good value for money.
In the debate regarding there being a difference between good debt and bad debt, the real answer is, debt is debt. However, if going into debt can in the long-run improve your financial picture, or the debt is or can be an investment, does that not make it good debt.
Examples of good debt are usually considered:
* Mortgages: Mortgages are loans granted to buy a property, and in most instances properties appreciate in value; meaning the go up in value.
As you pay down the mortgage balance, and the property increases in value, you gain equity.
The property and the equity is viewed as an investment. So being in debt to buy a property through a mortgage, many see as good debt.
* Student Loans: Many students attend university to learn and improve their lives later in life. This usually means getting a better job, earning more money, and in general being better off.
University students on average do earn more money, on average £29,000 annually, so by being able to earn more, some view students loans as good debt.
* Loans to start a business or company: Again, taking out a loan to start a business with the hopes you will do well and earn more, in addition to having better job satisfaction, is thought to be good debt.
As to the debate if student loans are good value for money, if university graduates are earning more money, then student loans may be a good investment through debt. However, many university students are graduating with a lot of student loans, and a lot of debt.
The Cost of Going to University
Tuition fees at UK universities can vary, but they don’t vary much, and £9,250 per school year is the current fees.
With many university degrees taking three (3) years of studies, this takes the student loan debt total up to £27,750, and this is before any other expenses or debts that may come about due to maintenance loans, or other expenses students will have, food, housing, transportation, etc.
Students can graduate with £30,000 or more of loans and debt.
Granted the repayment system here in the UK is very fair. Students do not begin paying back their student loans until they earn over £25,000 a year, and then they only repay 9% of what they earn over the £25,000.
An example would be this:
Until a graduate earns over £25,000 a year, they make no payments to their student loans.
If a graduate earns £29,000 a year, this is £4,000 over the threshold of £25K, by £4,000
£4,000 X 9% = £360
£360 divided by 12 months = monthly payments of £30
However, at that rate of payment, with the interest rate on student loans being over 6% while still studying, and then over 3% after graduation, a student may be in debt a very long time, a very long time!
If the loans are not paid off in 30 years, they are forgiven or written off.
So possibly, 30 years of debt.
So what does 30 years of debt do to your credit and credit score?
Student Loans and Credit Scores
Student loan debt here in the UK is over £100 billion…£100 billion!
Good debt or bad debt, that is a lot of debt.
And the question is, if a student is going to carry £30,000 worth of debt for many, many years, is that debt going to bring down their credit score, and credit rating?
Credit scores are important, not just in getting credit, but also for some jobs and insurances. And one might think all that student debt/loans, will cause one’s credit score to be low, and low is bad.
However, student loans do not lower your credit score, in most instances. I’ll explain.
Your credit score is currently made up of five (5) factors:
* Payment history
* Balances on your accounts
* Types of accounts you have
* How long you have had credit
* If you apply for credit on a frequent basis
These factors are used by the credit bureaus to get a numerical score that determines your credit worth, or score, but it is only made up of accounts that are reported to the credit bureaus.
If an account is not reported to the credit bureaus, it cannot be used in calculating a credit score.
Student loans are currently not reported to the credit bureaus. So you do not receive credit, or negative information on your credit history.
This does not mean if you apply for a loan, especially a mortgage, on the application it won’t ask about student loans, and if you have any. If so, the monthly payment cold be used to determine affordability, and if you qualify for the loan.
However, student loan payments, unless you are a big earner, are not going to be very high.
This begs the question, why pay more towards my student loans, I could just save money for a deposit on a house?
True, and it may be a fine balance and you’d need to do the math, but there is that option.
The only time your student loans would currently affect your credit and credit score, is if you default on the loans, and they are sent to an outside collection agency that does report such matters to the credit bureaus.
Then the loans can affect your credit history and credit score.
However, if you are earning under £25,000, once again you do not need to make repayments on the loans.
So in answering the question, will my student loans affect my credit score?
No, not really, only if you were to be earning more than £25,000, and defaulted by making no payments.