Can Credit Repair Help with Student Loans

Millions of Americans have student loan debt. If you are a part of the 43.2 million people that have this type of debt, you should remind yourself that you’re not alone! However, it can be difficult to manage these student loans when you have them. Even if you don’t have a student loan yet but plan on getting some, it can be daunting to handle the process. There are a variety of different student loan options available. These student loans could also mean trouble for your credit score if you don’t handle them properly.

Understanding Student Loans

There are a variety of student loan options available. However, you can better understand them in two categories! There are:

Federal Student Loans

This is a popular loan option for Americans because these loans tend to be more forgiving and flexible compared to private loans. There are four types of federal student loans. These options include direct:

Direct Subsidized Loans

This is a student loan option that can help undergraduate students that are in financial need. That means not everyone will be able to use this type of student loan. The amount that you can borrow depends on your school since they are the ones to determine how much you’ll get. However, a good rule of thumb to keep in mind is that the amount that you borrow will not exceed the amount of your financial need.

Interest rates for this student loan are a bit different as well. The United States Department of Education pays the interest instead of the borrower during any of the following timeframes:

  • You are in school at least half-time
  • During the first six months that you leave school (also known as a grace period)
  • During a period when loan payments are postponed (also known as deferment)

Direct Unsubsidized Loans

This is a student loan option that is available to both undergraduate and graduate students. Even if they are in financial need, that is not important for eligibility. Just like direct subsidized loans, the amount that you can borrow depends on your school since they are the ones to determine how much you’ll get. However, unlike direct subsidized loans, the borrower would be responsible for interest.

Direct PLUS Loans

While these may get referred to as federal student loans, they were designed for more than just students! Both eligible parents and graduate or professional students can participate in this student loan opportunity. When parents choose this loan option they are called parent PLUS loans. On the other hand, when students choose this loan option they are called grad PLUS loans. In order to qualify for this student loan option you must have a good credit standing since your credit score will impact whether or not you qualify. You still may be eligible if your credit isn’t the best but it is much harder! The most amount that you can borrow from this student loan option is the cost of attendance minus any additional financial assistance that the student got.

Direct Consolidation Loans

If you have more than one federal student loan then you may be able to benefit from getting a direct consolidation student loan. This student loan option gives students the chance to combine their existing federal student loans into one student loan. This means that even though a student has more than one student loan, they will only be responsible for one payment instead of many payments! Not only do direct consolidation loans allow for easier payment management, but it can provide students the opportunity for assistance options like Public Service Loan Forgiveness (PSLF).

Private Student Loans

While some students can benefit from federal student loans, others choose to get private student loans. These loans are offered by financial institutions like credit unions, banks, etc. These loans are unlike federal student loans that are offered by the government! It is recommended that you consider this student loan option after trying to get federal financing first. This student loan option is credit-based so your credit score will be an important factor in qualifying for this opportunity. However, you may be able to qualify if you have a cosigner. The student loan terms like interest rate terms, repayment terms, etc., will vary based on the lender and applicant information.

Understanding Credit Scores

It is important to have a clear understanding of your credit score when learning about how student loans can impact your credit. Your credit score is a number that falls between 300 to 850 (however, it can be outside of this range in rare circumstances). This score helps lenders determine your creditworthiness. Your creditworthiness is basically just how you handle borrowing money. This score is calculated based on information found on your credit report.

Your credit report has information about your credit history like credit usage, student loan accounts, collection accounts, etc. Credit bureaus are the ones to do this calculation to determine your score. Even though there are plenty of credit bureaus, there are three major ones. The three major credit bureaus are Experian, Equifax, and Transunion. Credit bureaus will use a scoring model to determine how each item on your credit report will impact your credit score. There are two main scoring models which are the VantageScore model and the FICO scoring model. However, the FICO scoring model is the one that lenders most commonly use.

What Factors Impact Your Credit Score

Regardless of what scoring models a credit bureau uses, there are five main factors that affect your credit score. However, in terms of how it affects your score we will be referring to the FICO scoring model since it’s most popular. These factors are:

  • Payment History
  • Credit Usage
  • Length of Credit History
  • Different Types of Credit
  • Hard Inquiries

Payment History

Your payment history is the most impactful factor to your credit score since it accounts for 35% of it. Your payment history will include details like any default accounts, late payments, etc. This is important to lenders because it can show them how you handle money that you borrow.

Credit Usage

The amount of credit you use will impact your credit score at 30%. Your credit usage is known as your credit utilization ratio and looks at how much credit you’ve used compared to your total credit limit. For example, let’s say that your credit limit is $5,000. If you spent $2,500 then your credit utilization ratio would be 50%!

Length of Credit History

The age of your credit (also known as the length of your credit history) accounts for 15% of your credit score. This will include the age of your newest account, the age of your oldest account, the average age of your accounts, etc.

Different Types of Credit

There are two main types of credit. There are either installment loans or revolving credit. An example of an installment loan would be a student loan. An example of revolving credit would be a credit card. This factor will account for 10% of your score.

Hard Inquiries 

Another factor that affects your credit score are hard inquiries. Hard inquiries (also known as hard pulls) require written permission from the consumer. Once the consumer gives this permission, lenders can get an in-depth look at their credit file. This in-depth look can help lenders get a better understanding of your credit score.

Where Does Your Credit Score Fall?

Depending on the scoring model that credit bureaus use, the ranges and ranks of your credit score will vary. When looking at the FICO scoring model:

  • Poor (scores between 300-579)
  • Fair (scores between 580-669)
  • Good (scores between 670-739)
  • Very Good (scores between 740-799)
  • Exceptional (scores between 800-850)

However, the VantageScore model will have a different set of ranges and rankings. When looking at the VantageScore model:

  • Poor (scores of 300-600)
  • Fair (scores of 601-660)
  • Good (scores of 661-780)
  • Excellent (scores of 781-850)

What are Different Kinds of Credit Repair?

If you see that your score could use some improvement, you may benefit from looking at different ways to handle credit repair. Some popular options include:

  • Get Help from a Credit Counseling Agency
  • Improve Your Credit Management Skills
  • Dispute Errors on Your Credit Report
  • Hire a Credit Repair Company

Get Help from a Credit Counseling Agency

A popular source of assistance when it comes to credit scores are credit counseling agencies. Credit counseling agencies are generally non-profit organizations. This means that the services they provide are usually free. There are trained and certified credit counselors that can help with a variety of financial situations like:

  • Credit management
  • Debt management
  • Money management
  • Budgeting

You can find credit counselors that can help easier than you may realize. The best place to get started is by trying the website of the Financial Counseling Association of America. You can also try the website of the National Foundation for Credit Counseling. When reviewing credit counselors you want to make sure that they are legit with your state attorney general. Some services that these counselors provide includes:

  • Help with managing your money
  • Developing a budget with you
  • Going over your credit report and current financial situation
  • Providing educational workshops
  • Creating a debt management plan for your current situation

Improve Your Credit Management Skills

Another great way to focus on credit repair is by improving your credit management skills. Bad credit habits can get people in a hole that’s hard to get out of. However, even though improving your credit management skills can’t change the mistakes you made in the past, they can help you avoid the same mistakes in the future. There are plenty of tips that you can keep in mind when it comes to making your credit management skills better. Some of these tips include:

  • Regularly monitor your credit score
  • Be consistent with paying your bills on time for the full amount due
  • Keep your credit utilization ratio below 30%
  • Don’t get too many hard inquiries at once
  • Check your credit report once a year
  • Only open new credit when you need it

Dispute Errors on Your Credit Report

Another way that people choose to handle credit repair is through the dispute process. The Fair Credit Reporting Act (FCRA) is a piece of legislation that makes sure that credit bureaus accurately report information on someone’s credit report. You can get a free copy of your credit report every year by visiting AnnualCreditReport.com. Once you get a free copy of your credit report, you can look it over to see if there are any inaccurate items on there. If there are, you can submit a dispute with one of the major credit bureaus. Once you submit a dispute, credit bureaus have 30 days to investigate and respond.

Hire a Credit Repair Company

Another way that people choose to handle the dispute process is by hiring a credit repair company. Instead of disputing errors found on your credit report for free, you can pay for a company to do it on your behalf. These credit repair companies would be the ones to get a copy of your credit report, analyze it for any inaccurate items, and submit a dispute to the credit bureaus. However, it is important to note that these companies do not provide a service that is special. Consumers can handle this process on their own for free! Instead, these companies advertise that their experience and knowledge can save consumers time and effort. Generally, these companies will cost between $19 to $149 in fees every month.

Understanding Your Student Loan and Your Credit

Now that you have a better understanding of both your student loan and your credit, you can get a better understanding of how these two topics relate to each other. There are some issues that a student loan can bring on to your credit.

What are Defaulted Student Loans?

Defaulted student loans happen when you don’t make the payments for your student loan in the way that you were supposed to according to the loan agreement. The loan agreement that you sign is also known as a promissory note. Not every type of loan will have the same guidelines around default payments:

  • Federal student loans: A majority of these student loans go into default once payments are around 270 days (9 months) overdue. However, some federal loans like a Federal Perkins loan (which is no longer being issued) can default instantly if you miss a payment.
  • Private student loans: While it can vary by lender, generally private student loans will default after three missed payments. However, since it varies you will want to confirm with your loan contract.

How Does a Student Loan Default Impact Your Credit?

If your student loan goes into default, then those late payments will be reported to the credit bureaus. This means that the late payments will be reported on your credit report. Which results in your credit score lowering since payment history is the biggest factor that can affect your credit score. These defaults can stay on your credit report for up to 7 years!

Can Credit Repair Help with Student Loans?

The way that you choose to handle credit repair will determine how it can impact the effect student loans have on your credit score. If you try to dispute your student loan with one of the credit bureaus, then you should expect these debts to stay on your credit report unless they are inaccurate. However, getting help from a credit counseling agency can help you better understand how to handle your student loans in a way that can even help your credit! You could also benefit from getting into better credit habits like making payments on-time, in-full when they are due.

Frequently Asked Questions

Your student loan and your credit score can be hard to understand. There are questions that others have had when learning about their student loans and credit that you may have too!

What is the Average Student Loan Debt?

When looking at student loans, the average student loan debt that a person will have is $32,731.

Will Student Loan Debt be on Your Credit Report?

Yes! Your student loan (regardless of the type you get) is a type of installment loan. This is a credit account that can be seen on your credit report.

Why are People Refinancing Student Loans?

You may have noticed that people are refinancing their student loans. It is common for people to do this since it can come with some nice benefits like:

  • The interest rate you get could be lower which leads to savings
  • You can choose to consolidate your loans to turn multiple payments into one payment every month

However, it is important to be aware that there are also some drawbacks that come along with refinancing your student loan. Some of the drawbacks include:

  • Federal repayment protections will get lost
  • It can be hard to meet eligibility requirements for a refinance

Bottom Line

Student loans are an important part of helping students get a higher education. However, many people don’t realize just how many student loan options are available. Students can choose between either:

  • Federal Student Loans (direct subsidized loans, direct unsubsidized loans, direct PLUS loans, and direct consolidation loans)
  • Private Student Loans

Regardless of the loan option, they can have an impact on your credit score. While they may be able to help your score if they are properly handled, they can also hurt your score. An example of how your student loan can help your score would be that if you make the payments on time when they are due, then that good payment history can help improve your score! However, if you default on your student loan then those late payments will stay on your credit report for up to 7 years and can hurt your score. Regardless, there are ways that you can repair your credit. While credit repair may not be able to get rid of your student loans, it can definitely help your score be as healthy as it can be!

Article References

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https://studentaid.gov/manage-loans/consolidation

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