Why do student loans suck so much?

We’ve been over this before.  My hatred of student loans and debt in general is well known.  But now I feel I have some new reasons to despise them.  I’ve been working with some people lately on building their credit and during this time I’ve found out that student loans like to screw with us in ways that, quite honestly, don’t even make sense under normal circumstances.  Of course, in the insane world of banking they make perfect sense but that’s a story for another day.

Look at this accident I got into while contemplating my student loans.  Truly horrific stuff.

Look at this accident I got into while contemplating my student loans. Truly horrific stuff.

You see, when you’re going through your few years at school, whether it is undergrad or graduate, and you have student loans paying for everything, you’re hurting your credit score.  Most people will tell you that by taking on term debt, which is what a student loan is, that you’re going to help add credibility to your name in the eyes of the banks.  While this may be true traditionally, it fails to take into account the years you spent in school, not paying that term debt down.  Even though you’re in school and either no payments or just some interest payments are required, you’re dinging your credit score.

What?  No one has mentioned this to you?  Yeah, I didn’t know either.  What happens is that because your term debt goes years without declining, the algorithms at Experian and TransUnion (and that other one whose name I can’t remember) look at it as though you are a bad payer.  It doesn’t matter that no payment is required, just that the balance is either not changing or going up (if the interest accrues while you’re in school).  While I completely get it…wait  no I don’t.  Nothing is due!  Gah.

Ok ok, this is fine though.  Sure your credit score went down but you saved up a lot of money in your first job post school and you have decided to be super responsible and pay off your student loans early.  Sure you lose the tax deduction but who cares!  No debt!

The banks care, that’s who.  And because you paid the student loans off early and they didn’t receive their interest, you’re going to get your credit score dinged.  Insanity.  Despite the fact that you just paid off your debts and have proven yourself to be a good risk for the banks in terms of them receiving their principal, you have made yourself a risk to them.  A risk that they will not receive their profits off of the interest.  Once again, insanity.

Normally, I don’t rant like this.  I get the system has quirks and I accept that.  However, coming across these to items while trying to help people improve their credit makes me furious.  There’s just no reason for this to hurt you at all, especially when a student loan is considered “good debt.”  What this does whole experience has told me is that people need to keep track of their credit!  There are two websites that can help you do this.  The first is www.creditkarma.com.  This site is run by TransUnion and gives you your score and a quick rundown of your report.  It’s a good free way to make sure you don’t have any derogatory marks on your credit.  The other site is the government’s annual credit report website.  Government regulations require the three credit bureau’s to give you free credit reports once a year.  These reports will be thorough and will tell you everything about your credit, including the names and numbers of the firms that gave your derogatory marks.  These two websites can help you sort everything out.  Often, you will only need to make a few calls to remove derogatory marks from your record.  Not the student loans, just people saying you didn’t pay on time.

Hopefully this post makes people think twice before adding another $5K or $10K in student loans when they may not need them.  Looking back, I wish I had done more to prevent getting my student loans.  Until next time folks!


Photo courtesy of Rool Paap