Student Loans and Credit Ratings
In discussing family accounts as a way to build credit, it was mentioned that people starting out will usually have student loans as their first credit account unless they get a car loan or credit cards tied to a family member with credit history. Student loans are a difficult area of installment credit history because they are not viewed as favorably as you might imagine.
You might think that opening student loan accounts when you first entered college would show account history, but in reality, it’s only when you start making your first payment that student loans will be considered a “credit history.” payments’. Most student loans are in deferred status while you are in school. Once you’re out of school, you have one to four months before companies start asking you to make monthly payments that pay the principal and interest.
Yet when you have student loans, you have an “amount owed.” This amount owed can actually lower your credit scores. On the one hand, you think making payments should boost your results, but then you’re annoyed that you have a large amount owed.
So what can you do sensibly about student loan debt? Do you want to pay it off now?
According to people like Steven Snyder and Robert Kiyosaki, if you have student loan debt, you want to make it the last thing you pay off. It comes down to IRS strategy. The history of this strategy has been around since student loans became necessary for people to go to college. The moment the IRS allowed you to use the student loan interest paid as a deduction, this strategy came into being.
How it works
Each month when you make a payment, you pay interest and a little towards the principal when you pay the bill recently.
When you file your tax return, you’re asked to enter the amount as student loan interest you paid.
The amount paid is deductible.
During that same period, you pay off a little of the “amount owed,” thereby reducing your total debt.
You’re also making payments, and as long as they’re on time and the full monthly amount, you’re helping your bottom line.
When you get to a point in your loan where you pay almost no interest on the balance, pay off the debt.
Student loans, when you first start taking them out, show up on your credit report, but with no payment history. This is an open installment account only. A lack of payment history doesn’t help or hurt your score. Debt utilization ratio on the other hand will hurt your score a bit. This is due to that debt making your score slightly lower than if you had no debt at all.
If it’s the only debt you have, then it’s also considered “little or no debt,” which also doesn’t help when you’re trying to get new loans on build your credit history.
When it comes time to make payments to student loan companies as part of your installment agreement, you must be on time and pay the requested monthly amount. If possible, pay more than the monthly amount.
Paying interest helps reduce the taxes you owe. You want that deduction and payment history. A deduction may be the only thing that helps you get a tax refund. Payment history also helps you increase your score as the balance decreases.
There will come a time when you will pay off the debt in full. Do this when your tax deduction is no longer significant. Reducing obligations will also help at this time. The reason behind this key point lies in the other credit you have built. You must be in your 30s or 40s, with a mortgage, credit cards, and other credit that weighs heavily on your ability to get credit. You no longer need your student loan payment history. In fact, given the amount of debt you may have at this point, you want to reduce the “amount owed” overall.
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