Should you steer clear of student debt?
Student loans are a common requirement these days for anyone looking to study. Whether you need help covering the cost of tuition fees, or you’re borrowing for day to day living costs, student loans provide an essential form of finance for tens of thousands of people every year. There are many common myths that surround student loans, most of which just don’t hold water. But, if you borrow now to fund your education are you likely to end up with problems in the future?
No: Student loans don’t impact your credit score
Contrary to popular belief, if you have a student loan at university then this won’t affect your credit score. The loan won’t show up on a credit report and the only way future borrowers will know if you’ve had student financing help will be if they ask you on a credit application form.
No: Student loans could actually help you with future borrowing
If you’ve had a student loan and you’ve made your repayments on time then you’re already creating a positive credit history when it comes to borrowing. This can have a much more positive impact than, say, borrowing via secured loans or doorstep loans. For many young people, the main obstacle to borrowing is not a bad credit score but an absence of any credit score. This is where student loans can help establish a healthy borrowing history – albeit not on your official record – as well as the ability to repay on time.
Maybe: You might struggle with repayments if you have significant student debt
According to modelling carried out for the Institute for Fiscal Studies, 70% of students who left university in 2015 will never pay off their student borrowings. Instead, those students will make repayments for 30 years and then have the remainder of their debt written off. If you’re still repaying your student debt years after you have left university then it’s important to remember that is an amount you will have to include every month in your budgeting. If you’re losing a chunk of your salary in this way then you might struggle to make repayments on future debts.
Yes: It could affect mortgage affordability
According to the Financial Conduct Authority, student debt is taken into account by mortgage lenders. While this may not impact on your creditworthiness in the mortgage lender’s eyes it is considered a committed expense. This means that it’s taken into account with respect to your outgoings when calculating how much you can borrow. So, the larger the monthly commitment to student loans – and the longer the period of time left to repay – the more a mortgage application is likely to be impacted. What this means in practice is that you may not be able to borrow as much as your income might have indicated.
As with any kind of borrowing, student loans that are well managed and paid off as quickly and efficiently as possible shouldn’t restrict your ability to borrow in future. While a student loan could affect some of your borrowing potential – depending on your circumstances – it certainly won’t cut you off from future borrowing altogether.
Amanda Gillam’s Bio:
Amanda Gillam is a blogger and copywriter for a number of websites including the Solution Money Blog where she writes about the fast-paced changes experienced by Millennials in their lives, careers and personal finances.