Defaulting On Your Student Loans Can Tank Your Credit Score
I mentioned above that responsibly using student loans can help you build a credit history and, with it, a credit score that will be useful throughout your life. But the alternative also holds true: If you are irresponsible with your student loan use, you can cause significant damage to your credit score.
What does irresponsible use of student loans look like? Taking out more than you can expect to pay off after graduation, failing to make your monthly payments on time, and defaulting on your student loans can all have major negative consequences for your credit score. Defaulting is the worst of all outcomes, as it means that youve gone for more than 270 days without making a payment on your student loan.
A bad credit score can follow you throughout your life, making you pay more for everything from credit cards to car loans to mortgages. It could even cost you your job.
Luckily, if you find yourself unable to make your student loan payments, you have options available to you. Income-based repayment plans can help you find a payment amount that fits into your monthly budget deferment and forbearance can see you through periods of economic hardship, and the Department of Education has even set up a default rehabilitation program to help you recover from default without damaging your credit score. If you cant make your payments, you need to communicate to your lender.
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With that in mind, I wanted to compile a list of all the major pros and cons of taking out student loans to pay for college. If you are applying for colleges and are considering taking out student loans to afford your education, keep these student loan benefits and drawbacks in mind before making a decision either way.
Can I Use A Personal Loan For An Emergency
If you need emergency money in college and youre considering a personal loan, first contact your schools financial aid office to discuss what emergency aid options are available.
Schools often have short-term emergency loans, completion scholarships, grants or vouchers available for students who have emergencies. An emergency that could fall under these programs would typically include a health emergency, death in the family, natural disasters or family job loss.
Personal loans from a bank, credit union or online lender can be used in case of an emergency, but they carry very high interest rates.
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How Much Student Loan Debt Is Too Much
There is no magic number of how much student debt loan is too much. The amount of appropriate debt will vary for every student and every family.
Students will be approved for a student loan limit based on their entire familys income. However, if your parents cant or do not plan to help contribute to the loan payments now or later, it may not make sense to elect to take the full student loan amount that youre allowed to.
To decide whats right for you, start by doing research on your ideal career once you graduate. Tools such as the U.S. Bureau of Labor Statistics Occupational Outlook Handbook can help. Edmit also offers salary information based on majors.
You wont want to take out a loan amount higher than your first-year salary, which should include all loans, private and federal, in the students name. So if you estimate your first-year wages to be $50,000, thats the best total loan amount to take out in order to promote a sound financial future post-graduation.
There may be some exceptions to this, such as if you plan to become a surgeon, and you can expect your salary to grow exponentially over time compared to your first year. This may not be the case in other professions, such as a teacher or journalist.
Next, talk with your parents and if they plan to or can contribute to loan payments now and after you graduate. If parents can help will be different for every family based on your parents life goals and finances.
How Do You Borrow College Money Under Federal Loan Programs
There are five letters to remember: FAFSA. To qualify for a federal loan, you will need to complete and submit the Free Application for Federal Student Aid, aka FAFSA. Borrowers must answer questions about the student’s and parents’ income and investments, as well as other relevant matters, such as whether the family has other children in college. Using that information, the FAFSA determines Expected Family Contribution, which is being rebranded as the Student Aid Index . That figure is used to calculate how much assistance you’re eligible to receive.
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How Much Should I Borrow In Student Loans
After calculating how much college will cost, you can start the process of deciding how much money to borrow in student loans.
First, subtract any money youre receiving from scholarships, grants, work-study, and federal loan programs from the total cost of tuition. Next, subtract how much you have in any 529 plans from that number. Finally, subtract any savings you and your family have.
The remaining balance is what youll need to take out in student loans to pay for college. Be sure to not include costs such as travel in this calculation. You only want to use student loans to pay for tuition related expenses.
Creating a plan for how you will repay the loans will also determine how much debt you should take on.
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Alternative Funding Sources To Help You Pay Your Tuition Fees
A personal loan is only one of the many options to pay for your college tuition. Others may come in handy if your preferred lender doesn’t allow you to use your funds for post-secondary education or if a personal loan isnt the best option, given your current situation. These other alternatives may even be favorable if they won’t increase your debt.
You Could Lose Your Home
If you fail to repay a standard loan, your credit could take a major hit. However, you will probably be able to keep your home.
If you cannot repay a home equity loan, however, your home is the collateral. The bank will take your house as a way to recoup their money, leaving you with nowhere to live.
Remember, you donât know what the future holds. Your home may not continue to increase in value, or you may lose your job or face an illness. Not having contingency plans in place can jeopardize your living situation.
One of the parents in the group agreed, saying, I think its a big mistake. If you lose your job, your home is on the line. If possible, loans should be the burden of the student, not the parent.
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There Are Some Downsides To Federal Student Loans:
- If you default on your loan by not making any payments for 270 days, then the government can garnish all of your tax refund and/or part of your wages or Social Security income.
- The amount of money you can borrow is limited. Freshmen can borrow up to $5,500 from your third year onward, the most you can borrow is $7,500.
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Opt For Federal Loans Before Private Ones
There are two main loan types: federal and private. Get federal loans first by completing the FAFSA. Theyre preferable because you dont need credit history to qualify, and federal loans have income-driven repayment plans and forgiveness that private loans dont.
You may be offered two types of federal loans: unsubsidized and subsidized. Subsidized loans for students with financial need dont build interest while youre in school. Unsubsidized loans do.
Take a private loan only after maxing out federal aid.
Factor In Future Income
You do not need to accept all the money for which you qualify. And nor should you if you anticipate your future income to be insufficient to repay that amount.
It’s a good idea to research starting salaries for recent graduates in your field using the resources at your school’s career center. This will give you an idea of how much you can expect to earn after graduation. Consider adjusting the amount you take out in loans to ensure that you can comfortably repay the loan with your future income.
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What Is The Maximum Student Loan Amount For A Lifetime
Most lifetime loan limits are somewhere around $140,000. Alot of this is going to differ depending on if you were going to justundergraduate school or if youre going to go to graduate or professionalschool as well. It is also going to depend on if you got any subsidized loansand if you are still a dependent.
Qualifying For A Personal Loan As A College Student
Finding funding for college takes preparation. Its best to know what most lenders look for in borrowers to increase your chances of getting your loan approved.
Remember, a personal loan may not be the best option in all situations. It’s generally best reserved for when youve exhausted other means of getting funding and just looking at it as a way to pay for additional expenses. Its best to understand what youre entering. Explore the various types of personal loans you can consider and their qualifying factors.
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Pros And Cons Of Taking The Loan Out In Your Name
Taking out a student loan for your child in your namefederal or privatecould mean less of a financial burden on your child as they enter college. Since the loans are in your name, its not up to your child to pay them, even after a degree is earned.
Having a loan under your students name, however, could help build their credit history. But if you have a strong credit history , youll likely be able to secure private loans at a lower rate than they could, considering their limited or nonexistent credit.
However, if you are unable to make timely payments, your credit could take a hit . It could also take a hit if you are a cosigner on a loan thats under your childs name and they cant make payments. It might help to talk through all these options with your child, making sure they understand what it means to cosign a loan for them. Similarly, if you decide to take out loans for them in your name, they should understand the responsibility youre assuming.
Theres nothing wrong with wanting to borrow for your childs future, just consider all your options and think about what you, or they, can afford to pay back. Its almost always a good idea to maximize federal aid and scholarships before resorting to loans of any kind.
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How Many Loans Should I Take
Ideally, you will take one to two loans, depending on how much money you need to borrow. This includes any loans in your name or your parents name to pay for your four years of schooling.
Consolidating your loans has a few benefits, such as managing your debt effectively, reducing the need for multiple credit checks, and paying less interest.
Your credit will affect the interest rate on your loans. But if you apply for a loan and are rejected based on credit score, dont fret. Your score will rebound quickly from the check, and youll be ready to apply to new loans soon.
Why You Shouldnt Count Out Student Loans
Student loans have gotten a bad rap over the last few years but theyre still the right choice for many borrowers. If youre looking at a huge tuition bill, you might not be able to get a personal loan thats big enough to cover it. Borrowing limits for federal and private loans can sometimes be higher than the amount that a bank can offer.
Another advantage of federal loans is that they come with some built-in protections. For example, if youre having trouble making your payments once you graduate you can get some relief through deferment or forbearance programs. In some instances, you might even be able to get some or all of your federal student debt forgiven.
Federal loans also come with income-dependent repayment options, so you can adjust your payment to fit your budget. Once you graduate, you typically have a six-month grace period before any payments are due. With a personal loan, your payments would be set for the life of the loan and youd have to start paying it back as soon as the loan is funded or risk paying more interest.
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What Happens If I Miss A Payment
If you miss payments, your loan can go into default. Federal loans allow nine months of missed payments before you default on a loan, but some private loans only allow one missed payment.
Loan default can damage your credit score, and it allows the federal government to use your tax refunds to offset your debt.
Given these risks, you should carefully choose your repayment plan to ensure that you can meet your monthly payments. You can potentially escape loan default by applying for loan rehabilitation or loan consolidation, both of which allow you to negotiate with your lender for lower monthly payments.
If you do miss a payment, there are a few ways you can mitigate the damage. First, applying for loan forbearance or deferment suspends payments for a short period. Unfortunately, interest may still accrue during this period, increasing the amount you owe and halting progress toward loan repayment or forgiveness. Deferment and forbearance also give you time to change your repayment plan to an income-driven pathway that aligns better with your earnings.
If I Cant Use My Personal Loan Funds For Tuition Where Should I Allocate Them
You can use your personal loan funds for most expenses, provided your lender doesnt have any restrictions regarding its use. Many opt to use this money for housing and rent, as having a place to live is the second-largest expense of college students.
You can use your personal loan funds to pay off your credit card balance if you use the card for books, supplies, electronics or meals. This may save you money in the long run since credit cards typically have higher interest rates.
Find Out Who Your Servicer Is And When Payments Begin
If you take federal loans, your debt will be turned over to a student loan servicer contracted by the federal government to manage loan payments. If you have private loans, your lender may be your servicer or it may similarly transfer you to another company.
Find your servicer while youre still in school and ask any questions before your first bill arrives, says John Falleroni, senior associate director of financial aid at Duquesne University in Pittsburgh. Theyre also whom youll talk to if you have trouble making payments in the future.
When you leave school, you have a six-month grace period before the first bill arrives.
About the author:Anna Helhoski is a writer and NerdWallet’s authority on student loans. Her work has appeared in The Associated Press, The New York Times, The Washington Post and USA Today. Read more