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Are Student Loans Impacting Your Credit Score? What You Need to Know

July 12, 2017

Even if you only have a basic knowledge of how credit scores are calculated, you may be aware of the fact that taking on debt and then paying it off in a timely and consistent manner is generally considered one of the best ways to build good credit, while late and missed payments can show up as black marks on your credit history.  What you might not know is that different types of debt can have different ramifications where your credit is concerned.

For example, the balances carried on credit cards are considered to be a form of revolving credit, according to Investopedia.  Lines of credit also fall into this category.  This type of debt includes a maximum limit and accounts are considered “open-ended”, which is to say, you still have access to agreed-upon funds even after you’ve borrowed and paid back up to the maximum.

Then there are installment credit accounts, including loans for houses, cars, and college tuition, just for example, which Investopedia characterizes as separate from revolving credit in that there are terms attached which specify the duration for payments, the number and amount of payments, and an end date for the loan.  Further, once payments are made, the money cannot be borrowed again.

These types of debt affect your credit score in different ways.  Revolving debt is potentially more damaging, as carrying high balances on credit cards could have an enormous impact on your credit score.  Revolving credit determines 30% of your score, according to MyFICO, although there are certainly other factors involved, including:

  • What is owed on all accounts
  • What is owed on different types of accounts
  • The number of accounts with balances
  • The percentage of revolving credit in use (credit utilization ratio)
  • The amount still owed on installment loans

Of course, if you find that revolving credit is severely impacting your credit score, Investopedia suggests that paying it down also has the potential to deliver significant improvements, and some people even utilize installment credit (personal loans) to pay off revolving credit as a means of lowering interest rates and shifting to a less impactful form of debt.

Although revolving credit accounts for a major portion of your credit score, installment loans can also have an impact in both positive and negative ways, according to an article from Student Loan Hero.  Here’s what you need to know about how student loans can impact your credit score.

How Can Student Loans Help Credit?

Because installment loans aren’t weighted as heavily as revolving credit when determining credit score, they may have less potential to damage your rating.  In fact, FICO statistics show that approximately 38% of consumers with student loan debt totaling over $50,000 fall enjoy a FICO score of over 700, which is considered the average score for American consumers, according to a recent article by Fox Business.  Those in the 740-799 range are considered to have very good credit, while a score of 800 or higher is considered exceptional.  By comparison, about 28% of consumers with student loan debt over $50,000 have scores under 599, which is considered a poor credit rating.

What does this mean?  It’s difficult to say, because credit ratings are based on so many different factors aside from student loan debt.  However, when managed appropriately, student loans, like any type of installment loans, could certainly improve a credit rating.

While revolving credit accounts for 30% of a credit rating, payment history is actually more important, delivering a whopping 35% of your credit score.  If you pay your monthly student loan bills on time and in full, you should be able to steadily build good credit over time, especially when you take the same care with all your other financial obligations.  Of course, this can be a double-edged sword, as well.

How Can Student Loans Hurt Credit?

While student loans don’t necessarily have the same major detractors as revolving credit, they still have the potential to harm your score if you don’t manage them appropriately, and even a single slip could cost you.

Even if you’re a responsible adult and you’re diligently paying down debt, it can be hard to juggle the many student loan payments associated with years of schooling (and taking out new federal student loans each year).  Something could slip through the cracks.  When this happens, it could have a negative impact on your credit score.

Even worse, the better your credit score, the more a late or missed payment could impact you, according to MyFICO.  This is because a higher score reflects less risk.  While a consumer with a lower FICO score is known to have some credit issues and is therefore somewhat less impacted by future problems like late or missed payments, someone with a stellar credit rating may fall further for similar infractions because the risk was not anticipated.  It doesn’t seem fair, but when paying down student loan debt, it’s important to understand the potential impact.

Why Does the Impact of Student Loans Matter?

Your credit score is used to determine whether you are approved for future loans and to calculate the interest rate and terms you are eligible for, according to Student Loan Hero.  While a single late or missed payment isn’t going to tank your score, and you can always speak with lenders about removing black marks on your credit report once you’ve rectified a mistake, you naturally want to maintain a high score if at all possible so as to improve your odds for loan approval and the best terms down the road.

How Can I Improve My Credit Score While Paying Off Student Loans?

Even if you’ve had smooth sailing so far, you may be interested in the benefits to be gained when you refinance student loans.  If you currently juggle several student loans and you’re worried about the possibility of missing a payment somewhere along the line, you could refinance and consolidate student loans into one convenient payment.

In some cases, you might even save money when you refinance student loans by lowering interest rates or transferring variable interest loans to fixed interest options.  It depends on your situation, but it’s something to consider when it comes to controlling how student loans impact your credit score.

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2019-08-03
How Does Student Loan Interest Work?

When you take out a student loan, you will not just be paying back the amount you borrowed – the lender will also charge you interest. The easiest way to think of interest is that it’s the cost paid by you to borrow money. Whether you take out a private student loan or a federal student loan, you will be charged interest on your loan until it is repaid in full. So, when you have finished paying off your loan, you will have paid back the original sum you borrowed (your original principal), plus you will have paid a percentage of the amount you owed (interest). Properly understanding the way that student loan interest affects your loan is imperative for you to be able to manage your debt effectively.  

The Promissory Note

When a student loan is issued, the borrower agrees to the terms of the loan by signing a document called a promissory note. These terms include:
  • Disbursement date: The date the funds are issued to you and interest begins to accrue.
  • Amount borrowed: The total dollar amount borrowed on the loan.
  • Interest rate: How much the loan will cost you.
  • How interest accrues: Interest may be charged on a daily or monthly basis.
  • First payment date: The date when you are expected to make your first loan payment.
  • Payment schedule: When you are required to make payment and how many payments you have to make.
 

How Different Types of Student Loans are Affected by Interest Rates

  • Government-Subsidized loan: If you are the recipient of a government-subsidized direct loan, the government will pay your interest while you are in school. This means that your loan balance will not increase. After graduation, the interest becomes your responsibility.
  • Parent PLUS Loan: There are no government-subsidized loans for parents, and regular repayments are scheduled to begin 60 days after the loan is disbursed.
  • Unsubsidized Loan: The majority of students will have unsubsidized loans where interest is charged from day one. If you have this type of loan, sometimes a lender will not require you to make payments while you are still in school. However, the interest will accrue, and when you graduate you’ll find yourself with a loan balance higher than the one you started with. This is known as capitalization. 
Here’s an example: In your freshman year, you borrow $7,000 at 3.85%. By the time you graduate in four years, this will have grown to $8,078 – an increase of $1,078. Here’s the math: 7,000 × 0.0385 × 4 = $1,078 (
Click here for ELFI’s handy accrued interest calculator.)  

How is Student Loan Interest Calculated?

When you begin to make loan payments, the amount you pay is made up of the amount you borrowed (the principal) and interest payments. When you make a payment, interest is paid first. The remainder of your payment is applied to your principal balance and reduces it.    Let’s suppose you borrow $10,000 with a 7% annual interest rate and a 10-year term. Using ELFI’s helpful loan payment calculator, we can estimate your monthly payment at $116 and the interest you will pay over the life of the loan at $3,933. Here’s how to determine how much of your monthly payment of $116 is made up of interest.   1. Calculate your daily interest rate (also known as your interest rate factor). Divide your interest rate by 365 (the number of days in the year).  

.07/365 = 0.00019, or 0.019%

    2. Calculate the amount of interest your loan accrues each day. Multiply your outstanding loan balance by your daily interest rate.  

$10,000 x 0.00019 = $1.90

  3. Calculate your monthly interest payment. Multiply the dollar amount of your daily interest by the number of days since your last payment.  

$1.90 x 30 = $57

 

How is Student Loan Interest Applied?

As you continue to make payments on your student loan, your principal and the amount of accrued interest will decrease. Lower interest charges means that a larger portion of your payments will be applied to your principal. Paying down the principal on a loan is known as amortization.  

How Accrued Interest Impacts Your Student Loan Payments

The smart money approach is avoiding capitalized interest building up on your loan while you are in school. This is because choosing not to pay interest while in school means you will owe a lot more when you come out. The more you borrow, the longer you are in school, and the higher your interest rates are, the more profound the impact of capitalization will be.  

How to Find the Best Student Loan

When looking for the best student loan, you naturally want the lowest interest rate available. With a lower interest rate, the same monthly payment pays down more of your loan principal and you will be out of debt more quickly. Talk to ELFI about our private student loan offerings by giving us a call today!  

Learn More About ELFI Student Loans

  Terms and conditions apply. Subject to credit approval.   NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
2019-07-31
What is FAFSA? And Why You Should Care

What does FAFSA stand for? FAFSA stands for Free Application for Federal Student Aid. You must submit the FAFSA to apply for federal and state financial aid to see you through college, and it must be submitted every year that you want financial assistance. Even if you don’t need federal financial aid, college admissions officers recommend that you complete the FAFSA process. Also, some private scholarships require the submission of the FAFSA. In both instances, this is because the application indicates your interest in the school and can boost your chances of getting in. Each school that you have listed on the FAFSA will receive your financial information after you’ve completed the form.  

How do I Get a FAFSA?

The FAFSA paperwork is available in both a printed and online format. Most families find it more convenient to complete the FAFSA online these days - to do so, go to
www.fafsa.ed.gov. Here you will find pre-application worksheets and step-by-step instructions for filling out the FAFSA. You can sign your completed form electronically with a Federal Student Aid (FSA) ID that can be obtained by going to this link. You can even opt to file your FAFSA from your mobile device. There are the following advantages to completing the FAFSA process online:
  • You’ll likely receive your Student Aid Report (SAR) quicker than if you had used the paper or PDF forms.
  • Your FAFSA will be less prone to mistakes because the online process comes with built-in error checks.
  • The expenses of the federal government will be lowered as its processing costs are reduced.
  • With the online FAFSA, you can list up to ten colleges; the paper version only has space for four. You should list all of the schools you’re interested in whether or not you’ve applied or been accepted yet. 
 

School Codes

Each school has a six-character Federal School Code (also known as a Title IV Institution Code) that you need to enter into your FAFSA. Be aware that some institutions have several codes to designate different campuses or programs. You can obtain a code by using this search form or calling the school's financial aid office.   

Paper FAFSAs

Paper versions are no longer distributed in bulk to high schools, libraries, and colleges, except in areas where students may not have access to the Internet. However, if you want a paper version, you can order up to three copies by calling 1-800-4-FED-AID (1-800-433-3242) or 1-391-337-5665. (Those with hearing impairments should call 1-800-730-8913.)  

Expected Family Contribution (EFC)

Your Expected Family Contribution (EFC) is a number that colleges use to calculate the amount of financial aid you’re eligible to receive. The EFC takes into account various factors such as your family’s income, assets, size, and any other family members who are attending college at the same time as yourself. Usually, a lower EFC increases your eligibility for more financial aid. Use a handy EFC Calculator, such as the one from FinAid to calculate your EFC and receive an estimate of your eligibility for financial assistance. You can also run “what-if” tests to find out how much assistance you’ll receive under various scenarios.  

When Should I Submit my FAFSA?

The FAFSA is available on October 1 of the year before you plan to attend school. Applications are considered on a rolling basis up until a summer deadline (which varies). Earlier dates may apply to state and school-specific aid programs. Don’t wait until the deadline; the earlier you submit your application, the more aid programs you’ll be in line for.  

So What Does This All Mean?

If you’re planning on enrolling in higher education, you’re probably giving some thought to financial aid. Completing the FAFSA will help you earn the federal financial assistance you need and deserve. For a very detailed guide to filling out your FAFSA, click here. And, don’t forget that help may be available from an advisor at your school.    After college, if you want help and advice on managing your student loan debt, talk to ELFI. Give us a call at 1.844.601.ELFI to speak with a dedicated Personal Loan Advisor.     Terms and conditions apply. Subject to credit approval.   NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.
2019-07-18
How Does Student Loan Refinancing Work?

When you agree to take out a student loan, you also sign on to a specific set of terms and conditions that cover things such as your payment schedule and the interest you’ll pay on your loan. These terms represent the obligations of the borrower and cosigner until the loan is completely paid off. Interest rates for federal student loans are determined by the government, whereas private lenders will set their terms according to your credit score (or that of a cosigner).

Can I Change my Loan Terms?

Before graduating, you probably didn’t give much thought to student loan repayment terms. That being said, student loan terms that fit your needs and goals before starting school aren’t always ideal for you following graduation. For this reason, it is possible to change your loan terms after you graduate, and if you’re approved for a new loan, the new loan servicer pays the old loan servicer for the cost of the loan. The student loan debt is then transferred to the new loan servicer. With the new loan typically comes new and better student loan terms.  

Why Should I Refinance my Student Loan?

Simply put, student loan refinancing works when you can take out a new loan in order to pay off the first loan with better terms. Here are four reasons why you might want to refinance your student loan:

Your Credit Score Has Improved Since College

Student loans provided by the federal government don’t take credit scores into account - every borrower is given the same interest rate regardless of credit history. If you have taken out a private loan, your interest rate could have been impacted by your or your cosigner’s credit score. After a few years in the workforce, your credit score usually improves. An ideal time to refinance your student loans is when your credit score exceeds 650. This should enable you to refinance your loan at a lower interest rate. Most student loan refinance companies will require a minimum credit score for refinancing approval, so be sure to seek that information out before applying.

A Longer Credit History Could Improve Your Interest Rate

Interest rates for private student loans are usually affected by your or your cosigner’s demonstrated credit history, and most student loan refinance companies will provide a minimum credit score to apply for refinancing. A refinancing company will also usually provide favorable terms to a borrower who has illustrated a financially responsible credit history – for example, by paying bills on time. An individual who has multiple defaults on their credit history is likely to receive less favorable terms or be turned down for refinancing.

Overall Interest Rates May Be Lower

Interest rates for student loans are tied to certain economic indicators at the time you applied for the loan. So, you may have a student loan with an above-average interest rate because you went to college when interest rates were high. When interest rates decrease because of changing economic conditions, you will almost certainly be able to refinance and get a better deal on your new loan.

Consolidation

Refinancing gives you the option of consolidating several loans with different interest rates into a single loan with a more favorable interest rate. One loan with one interest rate is much easier to manage.  

Fixed and Variable Interest Rates

When you apply to refinance your student loan, you can choose between a fixed or a variable interest rate. A fixed rate doesn’t change unless you are refinancing again. A variable rate will fluctuate over time based on certain economic indicators. Variable rates coincide with low-interest rates across the economy, and they can sometimes fall to below 3%. If you find yourself with a high income and interest rates are declining, then it may be possible to get a great refinancing deal. This works by choosing a variable interest rate and paying off your loan entirely before interest rates start rising again, or by taking advantage of a low fixed interest rate and sticking with it.  

Avoiding the Risks of Refinancing Student Loans

Refinancing your student loan can be a great choice, but there are some risks you want to watch out for:
  • High-interest rates. If interest rates are high, you might end up paying more over time than if you had stayed with your original loan.
  • Too many fees. Make sure that refinancing fees don’t outweigh the savings from your lower interest rate. Look for student loan refinancing that comes with no fees.
  • Unrealistic repayment schedules. Federal student loans provide you with access to repayment plans based on a low yearly income. Make sure that you can meet the monthly payments on your refinanced loan.
 

When Should I Refinance my Student Loan?

The primary reason to refinance your student loan is to shift into a much more favorable loan. That loan could have a lower interest rate and save you money. Additionally, if you qualify, you’ll have the flexibility to adjust the repayment terms. This means that you could pay the loan off with a shorter term or extend the term so it costs you less every month or is easier to manage.

Use ELFI to Refinance Your Student Loans

You may be pleasantly surprised at how easy it can be to repay your loan faster and more effectively. Doing so can help you avoid the stress of too much student loan debt and enjoy a more prosperous financial life. It can be hard to tell when the best time to refinance your student loan is, so click here for a handy student loan refinancing calculator to determine how much you might save. For a no-obligation consultation, call ELFI at 1.844.601.ELFI.  

Learn More About Student Loan Refinancing

  Terms and conditions apply. Subject to credit approval.   NOTICE: Third Party Web Sites Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.