As I said in my last post, my husband & I worry about how to fund our child’s post-secondary education. Pursuing post-secondary education is a very admiral goal and being accepted a major accomplishment. Preparing for this endeavor takes a lot of advanced planning on the part of the parents and the students. A priority that will be at the top of your list, I’m sure, is how you will fund this education.
Last time, I discussed how to fund your child’s education and while that blog post focused on starting to save for their education while your children are young, this today’s however, takes a look ahead into their future and the effects that student loan debt can have on our child’s credit rating. It’s amazing to think that so many children take out substantial loans to go to school and it can feel very scary as the economy still hasn’t rebounded completely.
As you may already know, in order to gain approval for any future loans, you will need to start building a credit history and continue to maintain a strong credit score. While, there are ways to obtain a loan without credit history or even poor credit, such as a secured credit card or other smaller, less risker loans – having less than stellar credit, definitely does present more challenges for the borrower. For example, even if you are approved, the interest rates you may have to pay will be much higher and this could impact how effectively you pay down your loan.
Just as with other loan payments, student loans also need to be managed effectively to keep a good credit rating. My husband & I feel strongly about teaching our kids the value of money and how to manage it properly. It’s so important for their future. If you do run into troubles paying off your student loan – your interest will grow, bumping up the total balance even further. You want to try not to fall into a pattern of not being able to pay or paying lower than the minimum balance, because this will surely affect your credit rating in a negative way.
Sometimes, post-secondary students with outstanding loans, can defer their loan payments until they are making an income that allows them to start paying. This type of repayment assistance means that loan payments, including the interest payments are essentially put on hold and even though your balance doesn’t decrease, fortunately your credit score is not affected.
Once you do start working however, you will likely be required to begin paying back your loans and this is when your repayment actions could ‘make or break’ your credit rating. If you are unable to pay back your loans on time, or you can not pay at least the monthly minimum pre-arranged balance, this will start to derail your credit rating fairly quickly.
In some of my previous credit related research, I have looked into the various reporting credit bureaus that exist in Canada and have discussed them. The 2 Canadian Credit Bureaus once again are Equifax and Transunion. All loans you are carrying, including your student loan debt information will be compiled by these credit bureaus to keep track of your updated credit history. You can request copies of your credit report from each agency to be aware of where your credit score and history stands.
If you are committed to managing your student loan debt on a continual basis, you will be able to establish a good credit score from the get-go. On the other hand, if your rating has already taken a hit from any previous financial mistakes, you can work at re-establishing your credit score as soon as possible and be in a better position for future borrowing and even for the peace of mind.
As a family, we already have a plan to save for an education fund for our children. Looking at how student loans can negatively impact your credit score does make me a bit worried about relying on student loans for future education. However, I think it is a good plan to strive to collect as much money in our education fund, so that if a student loan is necessary, at least the amount required will be lower and in turn not as difficult to pay back. If they do have to take out a loan, we can then encourage our kids to pay back the loan quickly creating a win-win scenario for them and their future.
Overall, I don’t think fears about student loan repayment should deter students and parents from attending post-secondary education and seeking financial assistance. As long as you can manage your payments and do not fall behind, you’ll be much more successful at keeping your credit score on track, while pursuing all of your educational aspirations.