The pause on student loan interest and payments is finally coming to an end. Student loan interest will start back up on September 1, 2023, and the first repayments will be due in October. If you haven’t made any payments in a few years, it’s time to revise your budget so that you can afford to make them now.
Student loan debt affects more than just your personal budget. It also has an impact on your credit score. That credit score is a determining factor in obtaining affordable insurance policies.
How Do Student Loans Impact My Credit Score?
Your credit report is your financial profile. This report contains detailed information about your debts and how responsibly you manage them. Your credit score is a snapshot summary of your credit report, delivered as a 3-digit number.When you need to borrow money, finance a product, or buy an insurance policy, the vendors will review your credit report and collect other information like income and bank account balances. If you have a history of late or missed payments, or if your debt is too high in comparison to your income, you might not qualify for the purchase. In some cases, you will be
approved for the purchase, but you’ll pay much higher rates or interest than someone with a better credit score.
Student loans can impact your credit in two ways:
1. If you have a history of late payments, or if you don’t start repaying in October, the delinquencies will drag down your credit score.
2. A high debt balance in relation to your income puts you at risk of falling behind on payments, reducing your credit score.
Many people mistakenly thought that their student loans were going to be forgiven over the last few years, and now they need to figure out how to budget these upcoming payments. Young adults, in particular, may be in for an expensive surprise as they try to move off of their parents’ insurance policy and obtain their own. Their limited credit history and high debt will result in high premiums.
Borrow Wisely to Avoid Future Credit Problems
If your family has not yet ventured down the student loan path, you have an opportunity to help your future college student protect and develop their credit score. The most obvious way to reduce student loan debt is to borrow as little as possible.
Make sure your student is looking into every scholarship opportunity available, and have serious conversations about the affordability of their college choices. In-state tuition, 2 years at community college, ROTC programs, and part-time enrollment are all ways to reduce the need for student loans. Also, perform a realistic long-term financial analysis. Plug the
numbers into a student loan calculator to anticipate the monthly payments. Then look up salary expectations for their planned career on the Occupational Outlook Handbook or O*NET OnLine websites. Will your child make enough money to cover living and loan expenses in their first 5 years out of college? If not, it’s simply not a wise investment.
When applying for loans, only take out enough to cover the cost of books, tuition, and housing. Far too many students take out additional loan money to cover spending while at college. It may make life easier in the moment, but they are going to be paying off those late night pizzas for 20 or 30 years. Students should be encouraged to work part-time during their college years to cover their own spending money, and even to start repaying loans early.
Be Aggressive with Your Student Loan Repayments
Restarting student loan payments is going to be painful for a lot of people. Many will opt for easier repayment plans, like income based repayment. Often, these payments do not touch the principal, only the interest. What’s worse is that the interest keeps accruing on the principal that’s not budging, so years of payments don’t even lower the balance!
Avoid this by taking a critical look at your principal, and set up a payment plan that chips away at it. Whenever you come into a little extra money that you want to use on your loans, apply it directly to the principal to further reduce the debt.
Student loans are a serious commitment. Don’t walk into any scenario for yourself or with your child without doing some serious financial planning. And if you are trying to get an insurance policy, but are worried about your student loan debt and overall credit, contact us to review your circumstances. We educate, nurture, and empower individuals to make smart
choices with whatever resources they have right now. And we’re always looking for ways to help you get better coverage at better prices as your situation improves. We serve clients for homeowners, renters, life, and other types of insurance in Hatfield, Lansdale, Souderton, Harleysville, and throughout Montgomery County, Pennsylvania.