Any time a student borrows money to pay for tuition or educational expenses, the loan appears on his credit reports from the three major credit bureaus. How a potential creditor views an outstanding student loan depends on several factors. Understanding these factors will help you better manage your accounts and may improve your chances of credit approval.
Student Loan Accounts
When a lender approves a student loan, the loan appears on the borrower's credit reports. At minimum, the credit reports list the lender, type of account, balance on the account and the status on the account. The report also has a section for comments, making it possible for lenders to give details about the status of an account. How an outstanding student loan looks to potential creditors depends on the account balance and status.
Account Balance
When you apply for credit, lenders consider several factors before approving or denying your application. The myFICO website explains that the formula for determining your FICO credit score uses information about the amount of money you owe creditors. A student loan with an account balance of several thousand dollars or more increases your total amount of debt, making you more of a risk to lenders who want to know that you will have enough money to make scheduled payments on your loans or credit cards.
Student Loan Status
Lenders will look at the status of your student loan accounts to determine your creditworthiness. A student loan account in good standing indicates that you pay your debts on time. A student loan account with late or missed payments makes you more of a risk for creditors. Lenders want to know that borrowers will repay what they owe, and having late or missed payments shows that you have not managed your accounts properly. Lenders may deny applications from borrowers who have student loan accounts in poor standing.
Consolidation
Student loan consolidation also affects your credit report and credit score. If a borrower uses federal loans for education expenses, his credit report will show several accounts. Subsidized and unsubsidized loans appear on separate account lines, making it look like a borrower has several outstanding loans. When you consolidate these loans, it effectively "pays off" the loans listed on your report. The new lender reports all of the consolidated accounts as one loan, making it appear that you have fewer open accounts. How consolidation affects your score depends on how you handle the new loan account. Late and missed payments on a consolidated student loan will hurt you just as much as late and missed payments on your original student loan accounts. Because student loan consolidation affects each borrower differently, consult a financial counselor to determine if consolidation would help you or hurt you.
Forbearance and Deferment
If you lose your job or experience other financial difficulties, contact your student loan lender to discuss forbearance and deferment options. These options allow you to delay making your student loan payments without the lender reporting missed or late payments. This will keep your loans in good standing so potential creditors do not see negative items on your credit report.
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