Using Student Loans to Protect Your Credit Rating

If properly managed, student loans may actually provide a way to protect the credit of a student, rather than hurting it. For parents who have good credit, PLUS loans are a wonderful way to allow the student access to the funds he or she needs for school, while preventing their credit from being affected. PLUS loans are credit based for the parent and have no bearing on the student credit as the parent does not have to cosign for the loan.

Student Loans and Credit

By allowing the parent to be responsible for all the student loan debt, the student can help the parent make payments when possible. The parent risks damaging their credit to give their child an education, but allows the student to start out in the real world with a clean credit slate. If the parent doesn't want all the responsibility, he or she can cosign for the loans and share the burden with the student. When the payments are made on time, both credit files will improve.

Bad Credit

For students with parents who do not have good credit and cannot qualify for a PLUS loan, student loans acquired in their name will help their credit and increase their FICO score while they are in school. How? The loans will show up on the credit report, marked paid as agreed until six months after the student has graduated and must begin repayment.

In order for the student to continue to protect his or her credit rating after graduation, payments must be continuously made on time. If for any reason the student cannot make the payments on time, he or she has two options: forbearance or deferment. Forbearance is a verbal agreement that states the student is aware of the debt and in making every attempt to pay the debt will make payments again on a certain date. Deferment, requires an application process, and will postpone payments for up to a year at a time, if approved. Various conditions must be proved in order for deferment to be granted.

Options to Keep Credit in Good Standing

There is up to 60 months of deferment or forbearance time available for each student during his or her repayment period, and each month the student elects to use forbearance will deduct a month from this time. While the loan will show up as paid as agreed on the credit report and prevent the FICO score from lowering, the student will continue to acquire additional interest charges. Though the payment of interest is not required while loans are in forbearance or deferment, it is an option.

For many students, student loans are necessary to complete their education. By ensuring the debt is paid in a timely manner, they will be able to ensure their credit scores are not damaged. If student loans default, they risk causing a lot of trouble for themselves or their parents. Many things, from collections to lawsuits and garnishments of wages may happen to the loan holders if the payments are not made for several months without proper arrangements. To preserve the credit score, it is best to make an agreement and follow it. Keeping the loan companies aware of the situation is the best way to handle it.



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