When discussing family accounts as a way to build credit, it was mentioned that people who are just starting out will usually have student loans as their first credit account, unless they get a car loan or linked credit cards. to a family member with a credit history. Student loans are a tricky area of an installment credit history because they aren’t viewed as favorably as you might imagine.
You might think that having opened student loan accounts when you went to college would show an account history, but in reality, it’s only when you start making your first payment that student loans will count as “credit payment history”. Most student loans have a deferred status while you are in school. After you finish your education, you have one to four months before companies start asking you to make monthly payments that repay principal and interest.
Yet when you have student loans, you have an “amount owed”. This amount owed can actually lower your credit score. On the one hand, you think that making payments should increase your scores, but then you are criticized for having a large amount owed.
So what can you realistically do about student loan debt? Do you want to pay it back right away?
According to people like Stephen Snyder and Robert Kiyosaki, if you have student loan debt, you want to leave it as the last item you pay off. This is an IRS strategy. The history of this strategy has been around since student loans became necessary for people to go to college. The minute the IRS allowed you to use your paid student loan interest as a deduction, that’s when this strategy came into being.
How it works
Each month you make a payment, you pay interest and a little on your principal, when you make a new payment to the account.
When you file taxes, you are prompted to enter the amount of student loan interest you paid.
The amount paid is a deduction.
During this same period, you pay a small portion of the “amount owed,” thus reducing your overall debt amount.
You also make payments, and as long as they’re on time and the full monthly amount, you’re helping your scores.
When you get to a loan stage where you’re barely paying interest on the balance, pay off the debt.
Student loans, when you start taking them out, show up on your credit report, but without any payment history. It’s just an open installment account. Lack of payment history doesn’t help or hurt your score. The debt utilization rate, on the other hand, will hurt your score a bit. It is because you have this debt that your score is a little lower than if you had no debt.
If this is the only debt you have, it is also considered “little or no debt”, which also doesn’t help when trying to get new loans for. 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 your taxes owed. You want that deduction and the payment history. The deduction may be the only thing you have available to 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 the debt owed will also help at this stage. The reason behind this key point lies in the other credit that you have built. You should be in your 30s or 40s, with a mortgage, credit cards, and other credits that weigh more heavily on your ability to get credit. You no longer need your student loan payment history. In fact, given how much debt you might have at this point, you want to reduce the “amount owed” you have overall.